Winnebago Industries Inc (WGO) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the Winnebago Industries first-quarter earnings conference call.

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

(Operator Instructions)

I would now like to turn the conference over to Ms. Sheila Davis.

Please proceed.

Thank you, Courtney.

Good morning, and welcome to Winnebago Industries' conference call to review the Company's results for the first quarter of FY15, ended November 29, 2014.

Conducting the call today are Randy Potts, Chairman of the Board, Chief Executive Officer and President, and Sarah Nielsen, Vice President, 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 investor.

WGO.net, and a replay of the call will be available on our website at approximately 1 PM 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.

This presentation may contain certain forward-looking statements within the meaning of the Private Securities Litigation 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.

FY15 first-quarter financial results were disappointing.

They were reflective of labor constraints, supply chain disruptions, and increased workers' compensation costs which persisted throughout the quarter.

Ultimately, these events prevented us from completing and shipping all of the motorized units that we would have, and are the main reason for our lower year-over-year margins and earnings in the first quarter.

As I just mentioned, labor constraints contributed to operational challenges, which we were unable to overcome.

The sustained strong growth in demand that we've seen for our products has necessitated a larger workforce to meet our increased production schedule needs.

Recruiting and developing this workforce near our main production facility in Forest City has been a challenge.

Additionally, while we've aggressively hired over the past year, there is a steep training and learning curve necessary to achieve optimal production efficiency.

Unfortunately, these labor constraints not only prevented us from completing all of the motorized units we should have, but we believe they also contributed to higher labor-related costs, a significant portion being an increase in workers' compensation expense, which lowered margins.

In conjunction with these issues, we also experienced supply chain disruptions, including quality issues with vendor-supplied materials and the timely availability of parts.

This heightened the operational challenges within the quarter, creating greater expenses, particularly on the labor side, again driving margins lower.

We've made progress towards solving these labor and supply chain issues thus far in the second quarter, and will continue to work to their resolution.

Additionally, we're exploring further opportunities to alleviate labor constraints through further expansion beyond our home base in Forest City, which would be similar in nature to the expansion that occurred in Lake Mills in 2013.

Another move like this would allow us to draw from a larger labor pool in nearby communities while keeping operations within a manageable range to our headquarters.

While these labor and supply chain issues are concerning in the near term, our positive outlook for the long term has not wavered.

We still see significant demand for our products, as evidenced by the sequential improvement in our backlog, which Sarah will discuss in a moment.

Additionally, we saw improving demand on the consumer side, as the Company's motor home retail registrations increased 19% in the first quarter and 30% on a rolling 12-month basis.

This growth has driven -- was driven by a strong demand across several product categories.

We also saw the fourth consecutive quarter of profitability in our towables group, as the segment generated strong operating income and impressive top-line performance with sales growth of just over 29%.

Recently we returned from the national RV Trade Show in Louisville, Kentucky.

We used the opportunity to showcase a multitude of product improvements, including new floor plans, enhanced features and styling.

We met with our dealer partners, suppliers, and many others from the media and investor community.

While the headlines after the show told of a decrease in overall show attendance, you wouldn't have guessed it by the traffic in our display.

We were extremely busy, with excellent foot traffic and order activity throughout the entire event.

Now, I'd like to highlight two strategic initiatives recently approved by our Board of Directors.

The first involves the engagement of a global business consulting firm to review and consult on our Company's procurement and sourcing of materials.

The objective of this project is long-term savings -- long-term cost savings for our Company.

As a result of the project, we expect to incur an additional $2.6 million in G&A expenses over the next four quarters.

This will be partially offset by margins -- by improved margins, potentially beginning in our fourth quarter.

When fully implemented, we anticipate this investment to provide gross margin expansion of 30 to 50 basis points.

The second strategic initiative is in an area that we've been evaluating for the past several years.

The Board has now approved the purchase and implementation of a modern ERP system, which will replace our outdated legacy systems.

This project will deliver long-term cost savings through the optimization of supply chain management and operational efficiencies once completed, in addition to a reduction in system maintenance, internal development, and support costs.

Our current estimate for the implementation of this project is $12 million to $16 million over a three-year time frame, of which we expect $1.5 million to be incremental G&A expenses in FY15.

With that, I'll close by saying we are working tirelessly to rectify the operational issues that impacted the first quarter, and look forward to improving financial results during the remainder of FY15.

I'll now pass it on to Sarah.

Thank you, Randy.

During the first quarter of FY15, revenues grew just under 1%, primarily driven by strong growth within our towables group, somewhat mitigated by lower motorized revenue.

Specifically looking at our first quarter ASPs year over year, here are the key changes.

Class A gas ASP was $96,843, up nearly 4% due to product mix.

Class A diesel ASP was $188,829, which is higher by over 9%, due to a greater mix of sales of our higher line products.

Class C ASP was $72,859, which is just over 1% lower.

Class B ASP was $76,795, a decrease of nearly 3% as a result of higher Travato sales.

Finally, total motorized ASPs were $98,301.

Moving over to our towable product, travel trailer ASP was $20,845, up nearly 7%.

Our fifth wheel ASP was $47,965, an increase of nearly 46%.

Thus, towable ASP in aggregate was $25,067.

Our dealer inventory increased 34% compared to last year, and stood at 4,192 units as of November 29, 2014.

However on a sequential basis, dealer inventory increased by a modest 213 units when compared to August 30, 2014.

On a year-over-year basis, the increase in dealer inventory in part reflects the strong demand for new product offerings, as many of our dealers continue to increase their stock of these products during the quarter.

Specifically, the this accounted for 19 percentage points of the dealer inventory increase.

Given the solid consumer demand for these products, we believe that they will continue to generate increased retail demand.

Moving to backlog, we saw motorized bookings in the quarter of 2,254 units, up nearly 19% as compared to the year-ago quarter.

This was a strong factor in the sequential increase of our motorized backlog to 2,122 units, a 12% increase from the 1,899 units we reported at the end of our FY14.

It should be noted that backlog at the end of the first quarter of FY14 included significant rental orders, whereas the backlog at the end of FY15 does not yet include such orders.

Later I will provide additional perspective during an update on the Apollo transaction.

Additionally, the year-over-year decline in backlog is largely due to our increased production rates over the past several quarters, which have allowed us to satisfy demand, particularly for some of our newer products.

We also had an adequate supply of chassis from Ford over the past three quarters, which was not the case last year, and as a result last year our Class A gas backlog was elevated.

One other point on backlog.

Last quarter we indicated that our backlog could represent between 70% to 90% of the next quarter's shipments.

With the operational inefficiencies in the first quarter and the increased order booking level, we fell a little short of this metric.

Meanwhile, with the increased backlog coupled with the operational issues that we are still working to resolve, we do not feel that this metric is applicable at the current time.

Gross margin declined 80 basis points year over year in the first quarter, largely attributable to the operational challenges that Randy highlighted.

Specifically, total variable costs as a percentage of revenues accounted for a majority of the decline, due to higher labor-related expenses, notably in the area of workers' compensation of nearly $900,000.

In addition, margins received additional pressure as we continued to make capital investments to increase capacity, and ultimately a more efficient manufacturing process.

During the quarter, an additional $300,000 of expense was incurred, as we continued with the installation of a significant capital expenditure, upgrading our e-coat system.

It is anticipated that this investment will be fully installed and operational by the end of our fiscal second quarter.

Operating expenses as a percentage of revenues were favorable, leveraged by 10 basis points for the quarter as lower G&A expense offset higher selling expenses.

Operating cash flow for the first quarter was impacted by higher inventory levels, primarily the result of increased work-in-process inventory and raw materials, and is reflective of both a strong demand for our products and the challenges that we experience.

We anticipate improvement in working capital during the second quarters as we resolve these items; however, we do expect similar working capital needs in the second quarter as we prepare for the rental build season.

Moving to rentals, I would like to provide an update on the Apollo transaction.

During the first quarter, we recorded $714,000 of net lease revenue.

When looking at the balance sheet, our investment in operating leases at the end of the first quarter decreased $6 million to $10 million.

Meanwhile, our operating lease repurchase obligation also decreased by a similar amount.

This decrease reflects the sale of units by Apollo directly into the used market and resulting -- they released us obligation for repurchase on 124 units.

At the end of the quarter, approximately 220 units remained subject to the repurchase obligation, which ends on December 31, 2014.

Based on the success of the initial rental relationship with Apollo, we are currently working on finalizing another rental order for them for next spring.

During the first quarter, we repurchased approximately 272,000 shares under our Board-authorized share repurchase program for an average price of $21.86.

$7.6 million remains on our share repurchase authorization plan, which has no expiration.

Our tax rate was 31.5% for the quarter.

Provided that President Obama signs the recently passed tax extenders legislation, we anticipate the tax rate will be significantly lower in our second quarter.

If the President signs the legislation, we expect our tax rate to be in the 31% to 32% range for FY15.

Including the ERP initiative that Randy discussed, we still anticipate CapEx in FY15 to be $15 million to $20 million.

In closing, we are disappointed with the financial results in this quarter, but maintain a positive outlook based on the continued demand that we see in the marketplace.

We will continue to work to resolve the factors that impacted our first quarter, while also striving to capitalize on future growth opportunities within all areas of our business.

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

(Operator Instructions)

Your first question comes from the line of Kathryn Thompson from Thompson Research Group.

Please proceed.

Hi.

Thanks for taking my questions today.

First question is, this is more related to Class As.

What percentage of your operating earnings contribution in the quarter were attributable to the Class A segment?

And then second, along the same line on operating earnings, could you -- what can you quantify in terms of the type of margin profile for the Apollo orders?

Thank you.

First, from the standpoint of breaking out the operational performance by a segment, we don't disclose that on Class perspective.

We definitely have a different situation from a Class A gas (inaudible) perspective because of last year's constraint on the chassis side of the fence.

Maybe Randy, if you want to add any color on Class A?

Well, there were several other things.

Sarah's mention of the Ford frame rail kind of glut that worked its way through the market is behind us, and I think that made for a higher than, I'm going to say normal gas A mixture on a year-over-year comp.

Also, a year ago we had just launched an entire, or were actively shipping, an entirely new diesel pusher product line.

So the year-over-year comps, while Sarah said we really can't provide the details, are a little unusual because of some extraordinary things that were happening for us in the Class A segment a year ago.

No, no.

And I totally understand the -- we are fully aware of the year-over-year comps.

What I was really referring to was more just looking at this quarter, just in a snapshot as of itself.

Trying to get a better sense and understanding of what is the real driver of your operating earnings?

We obviously have a good understanding that how much Class A's are of your total revenues on a [typical] basis.

But what we're wanting to get a better sense of is how much operating earnings is being driven by A's, and also just trying the to get a better sense of what are the margins of your Class C rental products?

That was the second part of your question in relation to the margin profile.

When you look at the Class C business from a rental standpoint, you'll see that last year's order was under a $60,000 ASP price point.

Now, because we have the arrangement of the operating lease elements of that transaction, that creates a different characteristic because the revenues on the units that we are leasing, we have to amortize over a period of time.

And so, as I mentioned, we had still $714,000 of revenue in Q1 related to that transaction from last year in our third quarter.

And so that creates a different margin profile, because really all the expenses associated with that were incurred in FY14.

So it really changes, I guess, the way it flows through in the P&L, because of accounting requirements.

Moving back on to the margin percentages throughout all the classes, there's not a -- because we have a low, mid and high in each segment, the margin profiles really follow along.

But when you blend that on a series average, the differential is not that significant.

You're talking maybe 1% and 1.5% difference between the various categories of margin profile.

On the Class A diesel and the Class B categories would be on the higher end, and then Class A gas and Class C are closer together and a little bit lower.

If that's helpful, that's a little bit of added color for you.

Okay.

That helps somewhat.

Just specifically for gross margins in the quarter, could you just put in broad buckets what was the greater determinant of the pressure?

Because it has some bearing on what is really more one-time or what something that will take a couple quarters to work through.

For instance, how much was the supply disruption versus difficulty in gaining labor versus just operating inefficiencies?

Well, as we mentioned in our prepared remarks, the lion's share of the pressure is all variable-cost related.

Notably, as it relates to workers' comp, as I shared that quantification, that was a significant pressure for us.

And we attribute that to be a function of working overtime for an extended period of time, and some of our newer employees were working hard in regards to any of the injuries, or any of the effects of the workers' compensation to be something that we improve upon on a prospective basis.

But that is a fact of our quarter, and when you take that quantification, that's nearly 40 basis points of pressure.

Installation of the E-coat system that I mentioned is one more isolated events.

We finalize that in Q2, and that's not going to be pressure for us on a going-forward basis, and that was closer to 13 basis points in the quarter.

From a labor inefficiencies perspective, that's in a range of 30 to 35 basis points of pressure.

That's harder to split apart from the supply chain element, which is very much correctable.

But also the training of our new employees, and that's going to be a part of our future to some degree as we continue to expand and hire more individuals.

Maybe I'll let Randy comment as well.

The other thing I would add to that is really dependent on what the supply chain issues are, they can have a pretty dramatic effect on labor efficiencies.

If the supply chain issues, and we had some really painful examples of this in the last quarter, where some of the issues were quality issues of components that we buy that weren't detectable until the product was nearing its completion stage.

And the detrimental effects of that is that the product now not only doesn't go through the regular process of being completed and shipped, but actually goes back into the system, requiring a lot of extra work.

And so that creates work in process, inflation, inventory issues and labor efficiencies because of all that extra work.

That was also a big part of our labor challenges.

It wasn't just finding the right amount of people, it was managing a lot of those issues we had.

Great.

And could you -- appreciate the color on the ERP system, and I may have missed it in your prepared commentary, but when will you start the process of implementing that system?

That's going to be part of Q2.

We're starting immediately.

As Randy mentioned, that has been an internal evaluation for the past two years.

So a lot of work has already been done in regards to how we're going to approach it.

But it's not something that happens quickly, because we have to ensure that everything is in place and fully tested and validated before we would put anything live into production.

So we look at it taking us the next nearly three years to be complete by the end of FY17 ideally or earlier, if possible.

It's a big deal.

Is it an SAP or Oracle product?

Microsoft Dynamics is who we're going to partner with.

All right.

Thank you for answering the questions today.

You're welcome.

Your next question comes from the line of Gerrick Johnson from BMO.

Please proceed.

Good morning.

Looks like most of the constraints were in the Class A side.

How were you able to grow Class B and Class C, yet have the difficulty in Class A?

Well, some of it is constraints that were specific to Class A, but some of it is also in the nature of what I mentioned where the level of Class A business comparison to year over year is a little bit skewed, just because of what happened a year ago.

I would say that one of the real painful constraints that we experienced that was more specific to Class A, had to do with a component that is specific to Class A's.

And it is a component that required a lot of work to be made acceptable, and the defect really didn't exhibit itself until the product was pretty far through the process.

And that's was, for the most part, that specific supplier quality issue was for the most part specific to Class A's.

I would say of everything that we dealt with in that first quarter, that would be the most relevant one.

Okay.

Can you tell us what that part was?

Well, it had to do with our exteriors, the exterior appearance of the unit.

I really don't want to drag a specific supplier by name into it, but it did have to do with the exterior appearance of the finished product.

Okay, got it.

And then when you say workers' compensation, is it accurate -- are you referring to injury payouts?

And if so, if there were injuries that occurred, did that shut down the line at all to rectify any problems, or am I getting that entirely wrong?

You're part right.

It does have to do with injuries, but most of them are -- I don't want to minimize it, but they're the kinds of injuries that often come with this -- in the type of work.

You've got a lot of people working with hand tools.

We do a lot to try to minimize lifting injuries, back strains, that kind of thing, but you still have some of those.

And most of the workers' comp had to do with really just the normal kinds of injuries that you get in that environment.

Not catastrophic kinds of injuries, not injuries that would stop production, but we are obligated to pick up medical expenses for employees who have injuries that are deemed work-related.

Okay, that's exactly what I was getting at.

Thank you for the clarification.

You're welcome.

I was going to just follow up in relation to what the experience was with both on the payment obviously increased, and then as a reserve is established on that new information, that increased our reserve level.

And we do have that evaluated on an actuarial basis, which will happen in Q2, because we are self-funded and that's required by the State of Iowa.

So there will be further analysis and work done on this particular subjective reserve inside of Q2.

But we felt that it was appropriate to increase the reserve level based on the trends we were seeing in Q1.

Your next question comes from the line of Craig Kennison from Robert W. Baird.

Please proceed.

Maybe start with your strategy to expand distribution.

I'm curious about the number of dealer points that you have, however you want to measure that, and just overall how that dealer expansion project is going.

In regards to that progress in the first quarter, there was a lot of movement but net-net, it didn't move the needle on our distribution points.

So in line with a lot of the discussions we've had on that strategy, it's in place and progress is being made, but we didn't have any notable uptick in distribution points in the three months since we last reported.

And the end of August we were approximately 2,600 distribution points on the motorized side.

But it still is very much a focus from the sales team in regards to optimizing where representation is out in the field.

And I would say that the increase in dealer inventory, in a great degree for new products is an output of that, the work that's been done in this quarter and in the past quarters, because we're getting more shelf space with the, basically the existing network that we do have.

But there are some adds and deletes happening for sure.

That's a new way for us to look at our business, and one of the things that -- I'm not going to say it was specific to that quarter, but we do phase out certain series over time.

And while you phase them out gradually, there comes a time where there's just kind of some housekeeping to do, and go back and just say okay, those aren't real dealer points anymore because that product has been phased out long enough.

So don't be discouraged by some lack of progress there.

Sometimes it's just going to have to do with some housekeeping.

But as Sarah said, I think generally there's a really big opportunity for us.

I would agree.

As it relates to your inventory comment, can you maybe quantify how much of the increase in inventory is really attributable to new dealer points rather than existing dealers taking on more product?

In my prepared remarks, I highlighted that the increase is primarily a result of when we look at more product, or new product in the channel that we wouldn't have had out there last year, that was approximately 19% of why we saw the increase.

And the rest is just expanding shelf space of existing products with the dealers we have, since we don't really have a significant -- there's not any change to report on our distribution points and physical locations inside the quarter.

Thank you for that.

And then Sarah, with respect to your margin outlook, you've given some nice color on some incremental costs, such as ERP, that will hit the expense line.

Where will it hit the income statement, number one, especially on the ERP side?

And maybe I'll stop with that.

We will be expensing those items in G&A.

From an ERP standpoint, there is an opportunity, when we look out into the next almost three years, to capitalize a good portion of that.

But there are some immediate expenses, and that will be included within our G&A.

And once we place it into service, then there will be added depreciation on a prospective basis that goes out on a longer term.

The other project we highlighted is also G&A expense.

But that's very specifically targeted at margin improvement, and we're looking at fourth quarter potential, beginning of positive impact on that.

So the expense will be a G&A, but the benefit is for incremental margin enhancement there.

And I know you provide limited guidance when it comes to margin.

Given these additional costs and what you faced in this quarter in terms of some challenges operationally, do you think EBIT margin can expand in 2015, or is that no longer something you would expect?

We're definitely looking upon the whole fiscal year as an opportunity to still meet the objective that we had set forth at the beginning of the year.

And I highlighted on our fourth quarter conference call that we didn't necessarily see we could maintain the pace of gross margin expansion quite at that same rate that we saw in FY14, but the plan was still to grow that.

But obviously this first quarter was a tough one, and we've got a lot of initiatives underway that we're looking at in the long term, more years than just the next three quarters, to really set the stage for our growth and the future for us here.

But we're still working hard to turn FY15 into a positive comp to 2014.

Thank you.

And then finally Randy, just on the ERP side, honestly a number of investors, when they hear ERP, they want to get up and run.

But clearly it's a strategic investment you and the Board think is necessary.

Could you maybe fill out why this is so important and why you feel confident that Winnebago can execute when the reality is so many firms have pursued this and maybe regretted it down the road?

Yes, it's a very fair question.

When I said we've been working on this for several years, it is the truth.

It's something that we've had in our radar for a long time.

Our legacy systems, while they've -- there's over 50 years of development there.

They're very specialized to how we run the business.

They are legacy systems that are written in a language that's not current anymore.

It's only going to get harder to adapt that system to the needs of our business going forward.

The legacy systems are written in COBOL.

They're on mainframes.

The writing's on the wall.

There's just no future in that.

On one hand, we really have little choice.

It has to be done at some point.

We felt the timing was right, and we're very, very excited about the opportunities we see in the package that we've selected.

There's a lot of reasons.

I won't go into all the details, but we just think it's a really good fit.

We think we have a very rational approach to how we're going to implement this.

We're going to try to minimize customization of the system.

We've had our own really very sizable internal IT department all these years.

So it's not like we've been working off of paper lists and spreadsheets and we're now transitioning to an ERP system.

We have an ERP system.

It's just a custom-made ERP system, and we'll be transitioning to a more modern system.

So there's only so much that -- information that you can gather before you take this leap of faith, but we're very comfortable with this.

Does that help?

It helps a lot.

I appreciate the answer.

Thanks, Randy.

You're welcome.

The next question comes from the line of Michael Swartz from SunTrust.

Please proceed.

Hey, good morning everyone.

Good morning.

I just wanted to maybe follow up on Craig's question, and just maybe dig into the margin expectations.

And then maybe just around timing, when did you start to see some of the issues in terms of labor costs and some of the supply chain issues creep up during the quarter?

Was it during the quarter, I would assume?

Yes, it was during the quarter.

It was, again, it was disappointing.

We did such a good job of executing in the fourth quarter, and it looked like the stage was set to really take that momentum into the first quarter and execute flawlessly.

But it didn't take long for some of these speed bumps to show up and start to slow us down.

Sometimes these things go in your favor and sometimes they don't.

Every day we're challenged with supply issues.

Every day we're challenged with issues in operations.

Typically as a whole, they're more manageable than the ones that we encountered in the first quarter.

And it just really piled on.

Again, it was disappointing to see that it became such a headwind.

But we did everything we could to work our way through them, and it resulted in the quarter ending the way it did.

I would assume with at least some of these you should start to see improvement in the current quarter, particularly with some of the rework issues on some of the components that you had some issues with.

Then on the labor side, in terms of the learning curve and getting people ramped up, that's probably a two-, three-, four-quarter item, I would suppose.

So I guess what I'm getting at is, I guess the prior commentary from last quarter -- or from last quarter was about 50 basis points in gross margin improvement.

I mean, how do you still feel about that, given what you're seeing?

And then in that 50 basis points, had you already included some of the potential benefits from procurement and sourcing that you're undertaking?

No, no.

We're not penciling that benefit in at that point.

As far as the headwinds that we did experience in the first quarter, I am confident in saying that we -- by the end of the quarter, we've worked through the majority of those issues.

It just wasn't done in time to get those units finished for delivery within the first quarter.

That's not to say the second quarter can't present issues.

One of the ones that hasn't been a problem yet this winter, but I think a winter ago we talked about a lot and our competitors talked about even more, were weather-related conditions.

Those can always happen over the winter quarters.

Not seeing that yet, and hopefully we don't.

But right now it looks like smoother sailing ahead.

Right.

Last year in Q2 -- seasonally Q2 is always a quarter where you have some additional cost pressures and less -- fewer days of production.

But we are continuing focusing on trying to improve upon our performance on a year-over-year basis, and that's our goal and objective.

We need to -- having a disappointing first quarter means we just need to try and work all that much harder towards a successful year.

Then just final question.

Coming out of RVIA a couple of weeks ago we heard from a number of manufacturers that dealers were accelerating orders ahead of the spring, kind of touching on what you were just discussing as far as some of the -- to get ahead of some of the weather issues that they saw last year, transport issues as well.

Is this something that you saw in the quarter, or you're seeing as well, is dealers kind of speeding up the orders into the calendar year 2014 to get around any of those potential issues?

We're seeing good orders, and I can't say that we've heard that that's the basis for the good order stream.

In fact, we sat down with our motorized supplier of transportation, outgoing transportation, and they were very confident that those issues weren't going to present themselves to the same magnitude that they did a year ago.

I'm not real sure where that would be coming from.

From a transportation perspective, the feedback we recently got from a really key partner of ours was that employment levels haven't dipped down here in the fall and winter like they have maybe in past years, so drivers are still employed now and busy, and that bodes well for the spring because there will be more capacity.

But I highlighted on our prepared remarks that we saw our bookings on a year-over-year basis grow about 19% inside of Q1.

And as Randy mentioned, it's not specifically attributed in our view that it's an acceleration.

It's a demand because we have a lot of new offerings and products that I think the dealers are interested in stocking.

One differentiator could be that in Iowa we're not competing against our competitors for that delivery service.

So with those problems fresh on the minds of customers that get their supply out of Indiana, notably the thousands of towable products that go out of Northern Indiana, it could be more specific to that, I'd suspect.

Okay.

Great.

Thanks for the color.

You're welcome.

Your next question comes from the line of David Whiston from Morningstar.

Please proceed.

Thanks.

Good morning.

Wanted to start on the, what sounds like a very tight labor market for you guys in Northern Iowa.

I was just curious, is this really different than maybe the last time we came out of recession, because I understand you're in a low population area.

At the same time, desirable manufacturing jobs at a good company like yours are hard to find.

Has something changed in the labor pool there?

There are demographic changes in Iowa.

They're hard to quantify, but we've always talked about our capacity of our plant as being based on the physical capacity of a bottleneck, that being our final assembly lines, in a fully staffed condition.

And that's how we've arrived at our capacity.

When you look at pre-recession employment levels of hourly employees in Forest City, we had looked at that as a reasonable target to potentially regain as we -- as the business came back.

It's looking like it's harder to get there.

You just have no way of knowing until you test the waters.

There just aren't any indicators that say exactly how many employees are going to be available to you next year.

What we are finding is that it is getting harder to find those employees, and we have to come up with ways of dealing with that.

Have you considered or have you actually increased the starting wages that you're offering?

We've done several things that are related to incentives.

We don't -- we're trying to find a balance.

We don't want to get in a wage war with other employers in North Iowa.

That won't necessarily drive up the level of employees that are available to us and could have detrimental effects on our -- the cost of labor.

So we have to be strategic and look at this from every angle we can.

Again, a big part of our labor issues in the first quarter were related to the supply issues, the fact that product didn't flow through the process the way it is -- it should.

In this manufacturing environment, it's very detrimental to your labor effectiveness, and you don't use the people you have effectively.

And it was a big part of the issues we had.

So it's multifaceted.

It's not necessarily as simple as just hiring more people.

Naturally that's a big part of it, but that's not the only part.

Okay.

And moving on to working capital.

Sarah, your comment in the press release, I'm just trying to gauge.

There's two offsetting things going on here.

Are you saying that basically inventory will be net neutral, or you're saying overall working capital will try to be net neutral in Q2?

We are looking at working capital in total, because as we resolve and moved on the inventories from the Q1 position, we're going to be in the seasonal side of the fence for building rental up, and that's going to have an impact in regards to just kind of mix of where our inventory is at.

And receivables, we don't necessarily see that they're going to be dramatically different at the end of the second quarter than they were at the first quarter.

But it's so dependent on the timing of when the units are shipped inside the quarter.

So there's some volatility based on that.

But so I think you're looking at my comment correctly, that there's maybe just an offset.

So net-net we'll be kind of in a similar position.

Okay.

And did you get the capacity utilization for the quarter?

No, we didn't.

I mean, going back to how I discussed we calculate capacity, if the people that we need are available to us, I think we'd say our capacity is somewhere between 70% and 80%.

The growing concern over the availability of the workforce is I guess why we're a little more hesitant to include that right now.

Okay.

And last question.

If your buyback rate were to continue, you would nearly exhaust the limit, the authorization limit, by the end of Q2.

Is the Board looking to increase the $7.6 million limit?

Definitely a topic on the agenda each quarter, but with the reinstatement of dividends and the shift of some of our cash into that form, at a minimum on an annual basis we want to be dilution neutral.

We're well beyond that this year, even with the purchases that occurred in the fourth quarter -- or excuse me, in the first quarter.

But, so we'll continue to evaluate that on an ongoing basis.

But a key piece of, I guess, our use of cash as it relates to returning to the shareholders is now in the form of a dividend, so.

Okay.

Thanks so much.

You're welcome.

Your next question comes from the line of Barry Vogel from Barry Vogel & Associates.

Please proceed.

I have a question for you, Randy.

How would you characterize competitive conditions in each of the two segments of the RV business that you're in?

One of them would be towables, maybe you can talk about fifth wheels and travel trailers as separate product lines.

And the other would be motorized.

In towables, it's hard to get a real good feel for the market in general, with us being still around 1% of the market.

I can speak to how we would -- how I would perceive it, but that's probably different than one of the really large competitors.

The way we approach the towable market is similar to the way we approach the motorized market.

We have a product that is differentiated in ways that takes us out of the, kind of the commodity perspective of products.

So what we're seeing in towables is an opportunity for that strategy.

It will, and I said this ever since we acquired that business, it's probably not a strategy that's going to see us to be a 30% market share player because at that point, again, you are really having to sell a lot of your product line based on price, not based on how it's featured and what -- how it's branded.

So is that what you're looking for, Barry?

I guess you basically said that you're not really -- it was only 1% share of the towables market.

You're not really in there competing with the larger companies.

That makes sense.

That's a good recap.

I mean, we are, but we're going to be more of a specialized brand.

It's going to appeal to a different, a slightly different customer than the masses are.

So onto the motorized side.

I see a very healthy market.

We are a big player in motorized and the market, I suspect we have some large competitors that are really driven on price.

They sell based on low price.

So their view of the market is different than ours.

We don't sell as -- on price.

We sell on value.

And we sell on the strength of our brand.

But there's a lot of opportunity there, I think for everybody right now regardless of how you're pursuing the market and how you're pricing your product and how you content it.

I think there's a lot of reasons to think the motorized market's going to continue to come back.

There's just more positives aligned right now than I can ever recall.

And I like the way it's coming back in a gradual way.

I think that's healthy for everybody, the manufacturer, the lender, the dealer base.

Now, in terms of the towable segment.

Sarah, you started to earn some money in the second quarter of last year.

Can you give us an idea of what your operating profits in towables were in the first quarter?

The first quarter was a positive one for us on the towable side, and it was a comp a year ago where we lost money.

So on the operating line standpoint, we saw nearly a $900,000 year-over-year improvement.

Does that mean you earned $900,000 operating profit in the quarter?

No, because last year we lost money.

So can you give us -- I don't think it's a big deal to break down the operating profits in towables in the quarter.

From the standpoint of our towables performance, we're now earning a margin that's very representative of where we are on our Iowa side of the fence.

And we don't break out any more specifics on that, and we're -- that's probably as much information as I can break out right now.

All right.

Because here you did, you took a shot as a Company to go into a very competitive area, and it would be nice for the investment community to find out how well you're doing profits-wise.

That's why I pursued this.

Now, as far as that component issue that you talked about for Class As in the quarter, can you give us an idea of what kind of component it was and how much it cost you, in your opinion, in the quarter?

Well, no.

We don't have quantified specifically how much it cost us.

There's just a lot of different ways you could look at that.

We can share a couple of the margin pressures we had more by the nature of what they were.

On a previous question, we were talking on our labor inefficiencies and the effect that that has a quarter.

And I highlighted from the standpoint of the margin impact where that was at in that 30 to 35 basis point range.

And that's not only associated with the challenges we had on the parts side.

That's got more to it than that.

But a portion of those inefficiencies were because we had to touch the product more than once, or the unit didn't flow through the system as it's designed to.

So I guess that's one of the key drivers.

We talked about a couple other margin pressures as well.

No, I know that.

And what about the D&A for FY15, what's your current estimate?

From a depreciation standpoint?

Yes.

We're looking at that to grow a bit in light of the CapEx that we're planning for the fiscal year.

We anticipate it will be in excess of $5 million.

Only depreciation, or includes D&A?

We don't have any items that are amortizable.

So at this point --

So it's about $5 million.

Yes.

Thank you very much.

I appreciate it.

Keep up the good work.

Thank you.

You're welcome.

Your last question comes from the line of Morris Ajzenman from Griffin Securities.

Please proceed.

Couple of questions you already discussed ad nauseam, but nonetheless here goes.

This component we just spoke about numerous times, is this done into the second quarter, this defect and making acceptable?

Are we clear sailing, or is it still an issue?

It's behind us, Morris.

I don't want to focus on just that one.

I mean, the one I focused on was more specific to A bodies because it was asked that way.

And it was one of the larger issues.

But there were several others, too.

But again, the vast majority of that is behind us.

It looks like smoother waters ahead.

Okay.

Second question, again, you talked about this ad nauseam again.

This quarter, again, the supply chain, the labor constraints, et cetera, workers' compensation.

You've answered.

I'm going to ask it again.

This quarter revenue's about $224 million, $225 million.

Actually if you look at the previous four quarters of the last fiscal year, all the quarters except for the first quarter were higher than this quarter, and you were positioned in the same manner.

Is this the perfect storm?

Your revenues didn't really ramp up materially to cause these inefficiencies.

Just the way things hit that this quarter, these issues just surfaced?

And I'm just trying to understand, it's just an anomaly, just things playing out this quarter?

The revenues didn't really pick up materially at all versus the previous four quarters.

Yes.

I don't like to put it that way because we strive to have more control of things than we ended up having in the first quarter.

But a lot of things did just go the wrong way that we wouldn't normally expect to have happen.

With that being the case, this second quarter, outside the two initiatives we're talking about now, the global consulting firm procurement and the ERP system, should things revert back to normalcy in this current quarter?

Excluding any weather, as far as the issues you discussed, is there any reason we should be concerned about this second fiscal quarter versus what happened in first quarter?

Well, as we've highlighted, our goal is to resolve and accomplish a more -- a quarter where we're not highlighting all the challenges as we are here.

I just -- as I previously highlighted I think on a different question, Q2 for us seasonally is always a different margin profile than we typically would have in some of the other quarters because of the time of year.

And our goal is to continue to outperform on a year-over-year basis.

But I think you're right, that we have a lot of opportunity for us inside of the second quarter.

As I said earlier, it was just so disappointing to see us finish the fourth quarter so robustly.

Again, everything going into the first quarter looked like they were really lined up.

I hate to see our team struggle like this.

Some of it's their own fault.

Some of it was just the way things were, the ball was pitched to them in that quarter too.

Naturally, our goal is to get things operating as normal.

There's just a lot of things that went bump in the night.

All right.

We're two, three weeks into this current quarter.

Again, I don't want to dwell on this because I do understand the longer-term scenario is very, very positive with the industry.

But the two, three weeks that we've seen so far, have things returned to some sort of normalcy, without being specific?

We border with guidance on this, but I'm sleeping better, if I could say that.

Thank you.

You're welcome, Morris.

Ladies and gentlemen, that concludes your Q&A.

I would now like to hand the call over to Randy Potts.

Please proceed.

Thank you.

While we outlined several short-term challenges this morning, we do have confidence in the future growth opportunities of the business.

Thank you for joining our call today.

We look forward to speaking with you again when we report our second quarter results on March 26, 2015.

And we all wish you very happy holiday season.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.