Winnebago Industries Inc (WGO) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2016 Winnebago earnings conference call.

(Operator Instructions)

As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Don Heidemann, Treasurer and Director of Finance.

Please go ahead.

Thank you.

Good morning and welcome to Winnebago Industries' conference call to review the Company's results for the FY16 third quarter, which ended May 28, 2016.

Conducting the call with me today will be Michael Happe, President and Chief Executive Officer, and Sarah Nielsen, Vice President and Chief Financial Officer.

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.

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

If you have any questions about accessing this information, please call our investor relations department at 641-585-6160 following today's conference call.

Certain statements made during today's conference call regarding Winnebago Industry and its operations may be considered forward-looking statements under the Securities Laws and involve a number of risks and uncertainties.

As a result, the Company cautions you that forward-looking statements are inherently uncertain and a number of factors, many of which are beyond the Company's control, 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.

With that said, I would now like to turn the call over to our President and CEO, Michael Happe.

Mike?

Thank you, Don, and good morning, everyone.

I hope you are all well.

It has been just over five months since having the privilege of joining the Winnebago Industries team this last January.

The learning curve here within the Company and within the recreational vehicle industry has been steep to travel but it has been a great journey of discovery to date.

While many have commented to me that this is a product business, I have also found that it is a people business, exhibited by the passion of our Winnebago employees that they have for their craft, the dedication of our channel partners to exceed customer expectations, and the loyalty and zealotry our end customers have for the RV lifestyle and the Winnebago products they use.

This energy provides a strong foundation for future growth.

Further observations of the opportunities and challenges facing Winnebago in the future will be shared during the back half of this call.

I will deliver here an overview of the key drivers of Winnebago's third quarter.

Our CFO, Sarah Nielsen, will follow by diving deeper into the details of our Q3 financials.

First, though, I would like to remind the investor community of the four important strategic initiatives that are very much active and present today in FY16.

Some of these are providing immediate value to Winnebago's market and financial results, but all of these are very much setting the stage for more accelerated success in the future.

First, we continue to spend significant resources on the implementation of a new ERP system which will empower our employees the to make more timely and effective business decisions and be more productive.

As many of you know, these transformative systems implementations really force us to think through the creation of improved future state business processes.

Secondly, our purchasing function is in the midst of a material make-over through the introduction and execution of comprehensive strategic sourcing processes, identifying material short-term COGS savings and establishing long-term procurement discipline.

We are just now beginning to extend this project back into our design and development area in order to search for even greater opportunity.

Third, the team is actively engaged in the opening of a new manufacturing and service facility in Oregon, creating a more streamlined assembly process for our evolving Class A diesel product line [item] and freeing up significant hours in north Iowa eventually for incremental motorized production in our Class A gas and C categories.

Pilot units are rolling off the line in Oregon and the team is actively engaged in setting up the whole of the supply chain.

Lastly, we are focused on leveraging our industry-leading brand strength and driving increased market share and profit improvement through an expanding product line and wider distribution footprint within our emerging towables business.

Our retail growth exceeds the pace of the overall industry and the enterprise here at Winnebago is starting to realize the full potential that we have ahead of us on this category.

Now, moving to the recently concluded third quarter.

The RV industry continues to experience growth in both wholesale and retail volumes.

This sustained growth has been steady and consistent for many years now.

Major factors include a widening demographic base of engaged end customers, access to affordable financing, low fuel prices, and products that continue to evolve in terms of technology and comfort.

In a historically cyclical industry, this period of sustained growth has been very promising.

Both Winnebago divisions, motorized and towables, had positive retail performance for FY16 Q3 versus a year ago.

Motorized retail registrations pushed towards a high single digit percentage unit comp with our Class B and C product lineups performing well at retail, driving an inordinate weighting of the overall motor home retail performance.

Towables also continues its strong momentum, delivering a retail increase of more than 40% in the same period year-over-year.

New products, such as the Winni Drop, are certainly contributing to our above-industry pace of growth.

In the third quarter, Winnebago achieved solid shipment sales and profit improvement results from a consolidated standpoint.

Our towables business continues to be one of the primary current performance drivers, as shipments and retail both continue to outperform the market thanks to several new products and more new dealer outlets.

In the motor home business, we also saw deliveries grow, as our increased focus on higher levels of manufacturing output translated to more efficient deliveries against a backlog that had stacked up in the last several quarters.

Retail results on our motorized business picked up significantly in May.

That being said, we are very much working to understand how we can improve our value position on the Class A gas line and mitigate current share erosion in that segment.

Our Vista and Sun Star models within the Class A gas series are gaining more attention from both our operations and product development teams and recent new floor plans within these lines are showing some very promising early results.

Winnebago continues to build on its own leadership position in the Class B motor home segment and drive increased value in our Class C line of products.

That emphasis will not lessen.

We continue to focus on improving product quality, preferably at the source, protecting and leveraging our brand's reputation.

The financial results from stabilizing and improving our quality control processes will likely not show up immediately as our current warranty levels remain elevated.

But we are seeing improved feedback from the channel and our customers on recent shipments and the setup work associated.

Regarding gross profit, our results there improved for the third quarter due to product mix, improved manufacturing utilization, and the benefits of our strategic sourcing initiative.

Year-to-date gross margins were up nicely and it is a trend we are focused on and will work hard to sustain in future years, especially as we pursue a higher level of operational excellence.

Continued efforts to transition Winnebago out of the OEM aluminum extrusion business are also starting to show its impact via higher levels of gross profit contribution.

The consolidated financials were also aided by the settlement of our Australia legal case, which in addition to negotiating a sizable financial resolution, will allow us to regain exclusive control of our brand and accelerate market penetration in that region.

Now I will turn the call over to Sarah who will review our Q3 financials in more detail.

Sarah?

Thanks, Mike and hello, everyone.

Year-over-year, third-quarter operating income improved 28% and net income increased by 26% on a 2% improvement in revenue.

The improved bottom-line result was in part driven by a third consecutive quarter of gross margin expansion as well as lower operating expenses.

Revenues improved 2.1% year-over-year, a result of higher overall volume, partially offset by lower ASP due to product mix, including the exit from aluminum extrusion sales.

As noted in our press release, towable unit volume increased over 62% and motorized unit volume increased over 12%.

The increased motorized volume primarily relates to our heightened focus on higher manufacturing throughput.

Clearly, we have made progress on this front, delivering more units by reducing the time it takes to produce these units, as motor home revenues grew 3.5% in the quarter.

Also contributing to revenue growth this quarter was the continued strong results from our towables group, where revenues grew 27.6% over last year.

As we are not labor constrained at towables, we believe we can continue to generate above market unit growth in this category.

Both motor home and towable ASPs declined in the third quarter compared to the prior year, a result of product mix, an increase in lower priced units, as well as decrease in higher-end products.

Third quarter gross margin expanded approximately 50 basis points year-over-year due to improved overall product mix, which includes our exit of selling aluminum extrusion products.

We also benefited from our strategic sourcing project in the quarter.

Partially offsetting these positives in the quarter was a continued unfavorable trend in warranty expense.

As we have previously discussed, we believe our efforts to increase internal unit inspection and streamline our product quality processes will have a positive impact on warranty expense in future quarters.

As I mentioned previously as well, lower operating expenses as compared to last year also contributed to our increased operating income.

Notably, G&A expenses were impacted in the third quarter by two key items: a positive legal settlement, partially offset by increased ERP expenses.

The positive legal settlement related to the resolution of an Australian trademark case had been in litigation for a number of years.

We are pleased that this matter is resolved so we can concentrate our efforts on exclusively expanding the Winnebago brand and market share in that region.

As Mike highlighted, we continue to invest significant resources on the ERP implementation project in terms of both dollars and people.

Since the Board approved this strategic initiative in December of 2014, we have invested over $15 million into this project.

Specifically in our third quarter, $1.7 million was included in G&A expense related to ERP compared to approximately $600,000 last year.

The overall effective income tax rate for the third quarter of FY16 was 30.2% compared to an effective rate of 28.6% for the same period in FY15.

For the full year, we anticipate a tax rate approximately 32%.

Moving to our balance sheet and cash flow, I would like to he highlight that cash generation from operations is up 71% year-to-date, primarily related to improved working capital.

As a result, we ended the quarter with a cash balance of over $71 million, up over $34 million from the second quarter.

Towable backlog grew over 100% year-over-year on a unit basis, driven by an expansion of our distribution base and new products.

However, motorized unit backlog decreased year-over-year influenced by several factors.

First, in the past few years, we have hosted a dealer event in our fiscal third quarter that historically would generate motorized sales orders.

This year, we elected to reallocate some of these marketing dollars to other programs.

Second, we experienced accelerated deliveries of rental units in the third quarter.

And lastly, we have begun to see some modest improvement from the operational improvement efforts that started in January.

In the quarter, these operational improvements allowed us to deliver motorized units to our dealer network more quickly and thus further reduce the backlog.

Finally, in the third quarter, our motor home dealer inventory was virtually similar to levels a year ago, but down from our second quarter in part due to spring retail activity.

Towables dealer inventory increased 29% on a year-over-year basis as a result of the popularity of our new products and successful growth of our distribution base.

Within both motorized and towables, we continue to believe that there's an alignment between retail demands and our dealer inventory levels.

This concludes my review of our quarterly financials and I would like to pass the line back over to Mike.

Thanks, Sarah.

I would like to start our final section here this morning with a brief overview of the recently issued RVIA economic impact study called RVs Move America.

We will then review some highlights further in the towables and motorized businesses as we close out FY16.

And finally, I'd like to return to the observation themes I shared in the last earnings call and provide an update and a review of some recent activities.

We have now, as an industry, seen seven consecutive years of growth.

And according to many signs are posed for another year of growth in 2017.

The industry is approaching the 400,000 unit mark in this calendar year, which is quite amazing when you consider the impact the recession in 2008 and 2009 had on the RV business.

Through the recent economic study, we learned the following:

Nearly 23,000 RV related businesses create an overall impact of nearly $50 billion here in the United States.

The RV industry directly employs over 155,000 Americans, paying $8 billion in direct wages.

9 million, typically middle-class families, own an RV and use them at over 16,000 private and public campgrounds in the US.

RV owners age 35 to 54 posted the largest percentage gains of ownership over the past decade.

The average age of an RV owner continues to fall.

Overall, we remain pleased with the state of the industry.

Like our competitors and all other industry stakeholders, we recognize the historical cyclicality of this industry and will continue to keep a prudent eye on the future, the appropriateness of the investments we are making here, and the health of the retail environment, including dealer inventory levels.

The challenge for Winnebago Industries is to continue growing our share in the towable segment as we have recently done.

But as importantly, we need to do a better job of competing for growth on the motorized side of the business as well.

While Q3 was better for motorized performance, we simply need to execute both operationally and in the market at a higher level.

Moving to our towables business, we have focused recently on several areas: One, increasing the breadth and retail vitality of our product line.

Two, expanding our dealer sales and service touch points in the market.

And three, igniting a renewed emphasis on increasing our levels of customer service in towables to some day match that of our motorized division.

We are making progress in all three areas but still have plenty of runway.

We have significant opportunity in the towables business to do a better job of leveraging our iconic Winnebago brand within customers, create dealer relationships that provide stability of presence in local markets and consistent profits for those channel partners.

And additionally, we want to capitalize on the goodwill that we have created through our substantial motorized business and legacy in that segment.

We will not be shy in making the changes necessary in our towables business to continue fueling growth and realizing opportunity in this division.

On the motorized side, our channel relationships remain very solid through the good work of our sales and service teams.

As previously stated, we continue to be pleased with our overall Class B and Class C market share, while continuing to work internally on plans to be more competitive in the future in the Class A segment.

The open house in Indiana in September will be a great opportunity to share some of those plans with our channel partners.

Our Travato and View products continue to do very well in the market.

I am also very pleased with the recent increased manufacturing output demonstrated by our operations employees in the third quarter.

They have responded well to our recent challenges to create organic capacity through continuous improvement efforts and the reduction of internal rework, all the while, improving on our still industry-leading quality.

We will need to sustain this manufacturing efficiency and output into the future as we look to further increase productivity and drive unnecessary waste and cost out.

The expansion to the west coast, through the startup of our new manufacturing and service facilities in Junction City, Oregon, will be a major step towards both increasing our overall capacity and efficiency here within the Company, but also raising our game in the still-important diesel segment.

Our service center in Oregon is open and serving both Winnebago and Country Coach customers.

We also have pilot diesel units making their way through the manufacturing process as we speak.

Several units have been nearly fully completed and they look fantastic.

Our team is taking advantage of the new manufacturing environment to overhaul our diesel assembly processes with a goal to be ramping up to robust production schedule by the end of our FY17 year.

This campus also provides a potential for us to explore the production of other lines, especially as our overall business on the west coast continues to grow.

Now during the second quarter earnings conference call, I shared with you a simple framework that was helpful for me at that time, 45 days in, in putting the learning curve journey into proper context.

I would like to review that framework, perhaps for the last time, and share some further observations and updates about the organization.

I'll start with strategy.

We will be committed at Winnebago Industries to building a strategic planning culture, one that allows us to be ahead of the business, anticipate customer needs more effectively and set the pace of competition.

We have recently engaged the Winnebago Board of Directors, our Executive Leadership Team, and select Winnebago employees in the formation of a much needed vision here at Winnebago, including a refreshed statement of our values and a set of strategic priorities which will guide us for the next several years.

While I recognize many of you are anxious to see this work, we have some final tweaking to do based on the feedback from the aforementioned groups.

You will likely not be surprised that elements such as leveraging our iconic brand, driving operational excellence, and instilling a stronger performance culture are several of many elements that will be included in that final product.

Once we finalize this vision and our upcoming multi-year road map, we will first share it with our valued employees and then work to provide you that visibility, hopefully by the end of the summer.

In the meantime, our leadership teams here are in the midst of a brand-new annual planning process for the FY17 year, which should help us immediately build a more robust, accurate and effective plan for next season.

I'd like to move to structure.

We must ensure that Winnebago's organizational design is set in a way to both serve in a now multi-campus enterprise and provide an ability to scale our resources appropriately as organic and non-organic growth occurs.

As projected, we have opened a small office in the suburbs of the Minneapolis St.

Paul market, where several of our current and future leadership positions will be based.

This has already proven effective in recruiting new talent and we are regularly engaging that metro market's resources to help us build stronger growth and profit plans for the future.

We continue to evaluate our overall organizational structure, manufacturing footprint, and the accountability and governance mechanisms we need to instill in the business.

More news will be shared in the coming months about Winnebago retooling its organizational strategy to more effectively compete.

The subject of people.

As I mentioned last quarter, we are focused on building a performance culture here at Winnebago, one which will raise the bar internally in terms of the level of talent and externally in terms of results.

This will be a balanced journey to blend the good, able team we have today and their intimate knowledge of the Company and the industry with the arrival of new talent, which should bring and be able to apply relevant best business practices.

We started that journey with the recent appointment of a new vice president of strategic planning and business development, Ashish Bhattacharya.

In this position, Bhattacharya will be responsible for establishing, developing and facilitating strategic planning and new business development processes.

He will be based out of our new Minnesota office, but like the rest of the evolving Executive Leadership Team, will be expected to be physically present in the business wherever needed.

I am extremely excited about Ashish's arrival, especially as we scan the landscape for future growth opportunities.

The Company is increasingly well-positioned from a balance sheet perspective to be smartly active on the right growth opportunities.

We also recently announced the election of a new chair for our Board of Directors in Bob Chiusano and the recognition of two retiring long-time directors later his calendar year.

We anticipate the evolution of our Board's composition and engagement will have a strong accretive impact on future strategy.

In addition, we will continue to identify and develop key talent internally within the organization, with the goal to unleash accelerated growth and profitability and create a stronger level of competitiveness and accountability.

Much work is also under way here at the Company to modernize several of our employee engagement policies to both motivate our teammates to drive new levels of productivity, but allow our employees to share in the future gains and hopefully the value creation we execute within the Company.

Lastly, processes.

As stated earlier, the continuing ERP implementation project is providing opportunities every day for the Winnebago team to create a future state for many if not all of our business processes.

This is an inflection point in terms of systems transformation that we must take advantage of.

I would like to mention, though, three other areas of activity that we believe will lead to stronger results in the future.

One, in late May, we launched an operations assessment project focused first on our north Iowa manufacturing and vertical integration facilities.

This assessment will provide us a clear, updated point of view on the significant continuous improvement opportunities that reside in our north Iowa operations.

Projects will be broken down into quick hits, medium-term and long-term opportunities, and we will work feverishly to monetize the value of these opportunities and drive more organic capacity with the same existing resources.

Second, we have launched a brand vitality study that has never been done before here at Winnebago.

This study will both validate the current strength of our flagship and iconic Winnebago brand, but it will provide us valuable insights into areas such as market segmentation and competitive brand attributes.

Our brand is one of our most important assets and this study will allow us to be more progressive and sophisticated in how we position ourselves and create preference for Winnebago products in the market.

Last, our strategic sourcing project will be accelerated and expanded in the coming year.

Under strong leadership, we have driven impressive results in the first 18 months.

The next stage will expand this effort to further commodity and material groups and impact our towables business as well, in addition to our existing activities on the motorized side.

We can and will create a culture where waste is driven out relentlessly and systematically.

So as we wrap up our call this morning, or at least our opening comments here, I wanted to remind you all of the upcoming Winnebago Grand National Rally being held here in Forest City, Iowa in late July.

This annual event attracts thousands of passionate Winnies from all over North America in a celebration of Winnebago and the RV industry as a whole.

We get a chance to not only say thank you to our loyal customers and have some fun, but also spend valuable time listening to them about the ways we can improve our products and our overall sales and service experience.

I am looking very forward to attending my first Grand National Rally in another month.

At this point, I will ask the operator to please open the call for questions.

Thank you.

(Operator Instructions)

Our first question comes from the line of Craig Kennison with Robert W. Baird.

Your line is open.

Good morning and thanks for taking my questions.

Mike, I want to thank you for that framework.

It's quite helpful.

And I also want to be an advocate as think about disclosure going forward, for maintaining what I think is the best-in-class disclosure and hope you continue that.

My question is on the rental business.

I think last year you shipped 375 rental units in Q3.

What was that number this year and what is left to ship based on that order?

Good morning, Craig.

This is Sarah.

As it relates to our rental business, as we've highlighted, it's been accelerating from the standpoint of activity in Q3 versus a split of Q3 and Q4 for some of the sizable components of our business.

And as we shared on our call last quarter, the overall volume of our rental business was growing this year as compared to last year in that 15% to 20% range.

Is there a way -- are you willing to share what the actual number was so we can kind of forecast rental units going forward?

Well, from the standpoint of -- it's irrelevant I guess in a couple ways, but I appreciate your question.

As we highlighted in our press release, it has an impact to our backlog with the acceleration of the units from that perspective and also strong growth in our overall C volume inside the quarter is, in great part, a function of our increased rental shipments this year and the movement of a bit of that from Q4 to Q3.

But from a competitive standpoint, that's probably the key remarks I'd want to highlight as it relates to our rental business.

Okay.

Thanks.

And then just on the credit side, do you have a feel for the credit profile of your customer?

We've seen some evidence of softness within the sub-prime credit tiers.

But it's my impression that your exposure with that demographic is limited.

I agree, that's the correct conclusion, at least in our opinion as well.

When you look at the segmentation of our typical consumer, it's going to be that 55 plus.

Now, we certainly have product categories that are you appealing to younger consumers and, as Mike highlighted with the information in the RVs Move America, the overall trend is moving, that age is decreasing.

But we definitely have a strong amount of retail consumers in that 55 plus and our typical Winnebago customers are very strong on creditworthiness evaluation based on what we hear from our partners in the pouring side and based on the surveys we also do with our consumers.

Thanks.

I'll get back in the queue.

Thanks.

Thank you.

Our next question comes from the line of Kathryn Thompson with Thompson Research Group.

Your line is open.

Kathryn, check your mute button.

Hello?

Hello?

Yes, we can hear you.

This is Ninjin sitting in for Kathryn.

I just have a quick question on the motorized division.

Can you provide more color on this quarter's Class A unit deliveries and what type of products are selling better within diesel and gas and could you provide more color on the movements within the current motorized backlog, excluding the impact from rental shipments?

From the standpoint of shipments, you'll look at the mix of the products and because of the very strong amount of rental business and continuing strength in the B, that is where you're going to see the growth inside of Q3 as comparative to the last year.

Mike touched upon some of the new product offerings that we see successful in the market in the Class A gas piece of our business.

And we're going to be continuing to bring to market new floor plans and products on a prospective basis.

But we definitely were devoting more of our production capacity inside of Q3 related to the B and C in light of the strong demand we had in those segments.

And then as it relates to your backlog question, I kind of touched upon three key things in regards to overall backlog that I think are important and you touched upon one of them and it's rental had a little bit of an impact when you look on a year-over-year basis.

But also a function of we are more efficiently producing our products and that allowed us to deliver more inside the quarter and helped pull that backlog down in that regard.

And then also on a year-over-year basis, we had our dealer day event a year ago and we did not elect to have that event this year, really chose to spend some of our market dollars in different ways and that's a comparison or a difference in regards to impact on our backlog year-over-year as well.

Okay.

That's helpful.

Thanks.

And in your prepared remarks, you mentioned product mix and the strategic sourcing initiative benefit growth margin.

Could you provide more details on the contribution of these factors, the margin expansion this quarter and also for the strategic sourcing initiative, any guidance on how that would benefit in the coming year?

Was the expansion and acceleration you mentioned in the call earlier?

From a margin standpoint, as I indicated and we shared in our press release as well and Mike touched upon it, the three key drivers we want focus and talk about are the improvement in our product mix, and that's a function in the RV categories, and as well as not producing aluminum extrusion and selling that product to the end customer, which had a positive impact to product mix in that regard.

Secondly, it was a function of strategic sourcing, and then the third piece was partially impact, or offsetting these positive drivers was elevated warranty.

So those are the one, two and three key items driving what's happened inside the quarter and those would be the key pieces of information we would like to externally share.

Okay.

And then any guidance on the coming year?

Because you mentioned that you will expand it and accelerating it to other departments over the coming months.

I'll comment on that.

As I think Sarah and Don in past calls, when the strategic sourcing initiative was launched, shared some initial goals, and I think we're very much on target to, at the end of this fiscal year, to reaches those goals.

The sourcing team has done a tremendous job.

What I can tell you, and the targets for the future are being still finalized, probably as a function of me pushing that team even further.

I anticipate that the results in the future year will be similar to hopefully even little better.

But we just have not finalized sort of the final targets.

And as we talked about, we're in the midst of finalizing our FY17 plan at the present time.

But we are very optimistic that the strategic sourcing initiative can continue to have a net accretive impact on gross profit and margin improvement in this organization.

Okay.

Thank you so much.

That's all my questions for today.

Thank you.

Our next question comes from the line of Gerrick Johnson with BMO Capital Markets.

Your line is open.

Thank you.

Good morning.

Sarah, you talked about unit growth in motorized and increase in deliveries there coming from better efficiency, getting product through the plant more quickly.

Was there any benefit that you can talk about from the aluminum extrusion business and getting out of that and then transitioning wire harnesses to Waverly?

And then maybe still incremental benefit from Lake Mills?

And then related to that, in the quarter, was there incremental expense from any of those initiatives, also including Oregon, that won't be repeated going forward?

The first part of your question, we definitely look at the exit from aluminum extrusion to be part of our product mix.

So we really are categorizing that from the standpoint of the contributions from a total standpoint, the mix of what we delivered from motorized, plus the fact that, and we've transitioned out of that lower margin business.

And so collectively, all of that is what we are attributing a piece of that margin expansion from a product mix perspective.

From the key points on some of your other parts of the question, from a Waverly standpoint, that has been ongoing throughout the year on expanding that labor base and training those people and getting better at that.

It's a very complicated process.

Mike had an opportunity to go see how complex that is in regards to what we do down there.

So we continue to train and we would need to do that here in Forest City, and expand and hire people or in Waverly so that's just kind of part of the business now ongoing.

Lake Mills, where we produce B products and do some other things, that's a significant part of our opportunity as we continue to maximize on our market share and demand from a Class B standpoint.

And so key part of what you see in our results for the quarter, no I guess specifics to highlight beyond that.

And then, from the Oregon, we really had our sizable investment in Q2 when we purchased the facilities and there are efforts going on as relates to readying the facilities to produce the product and we're doing some pilot units right now.

But we're really staging all of those kinds of expenses to be in line with the overall timetable, which Mike touched upon.

So I guess those would be the key points I would make as it relates to Oregon.

Okay.

All right.

Thank you.

And can you tell us what the dollar amount of the legal benefit was from the litigation and also what were you spending per quarter on litigation that kind of goes away?

As I mentioned, it's been a litigation case out there for a number of years and in certain instances we had more expenses in the years than others.

The settlement was $2.75 million, and collectively, this fiscal year, we had invested legal fees of $200,000 to $250,000 in that case.

In past years, as I mentioned, it's kind of ebb and flowed.

But really happy to have that behind us and concentrate on the future as opposed to spending time and energy on that specific case.

Okay.

So the $2.7 million is the benefit in G&A and that's part of the reason why it goes from $6.5 million to $4.9 million?

Yes.

Okay.

Okay.

As I highlighted, offsetting that to some degree, is the elevated ERP expense this year compared to last year in the same quarter.

Sure.

That's something we had modeled, but I had not modeled the $2.7 million gain.

So that's what I was getting at.

But thank you for that, Sarah.

I appreciate it.

Oh, you're welcome.

Thank you.

Our next question comes from the line of Michael Swartz with SunTrust.

Your line is open.

Good morning, everyone.

Maybe just to add onto Gerrick's last question.

Are there any benefits going forward from the settlement in Australia or is this kind of the bulk of them here in third quarter?

Well, I would say from a legal standpoint, the case in our opinion should be closed now at this point.

Okay.

Our team worked hard obviously to put ourselves in a very positive position to be able to negotiate a favorable settlement.

We feel very strongly about our position in that particular case.

What it will now benefit for us in the future is it will remove some uncertainty in the market around the ownership of the brand.

And it will allow us to very candidly probably work with our partners in that market to sort of refresh our strategy and find ways how to hopefully accelerate market share and growth in the future.

So we certainly are hopeful that there will be some financial benefits down the road that will be related to the resolution of this case.

And again, we're very excited to have the exclusive rights to the Winnebago brand again in the market.

Okay.

Thanks.

And just moving on, another question.

Over the past couple years, you guys have reallocated a lot of your resources, capacity towards Class C. When we think about the new facility in Oregon starting up, and I think you said maybe more of a full ramp late FY17, how do you talk to dealers about that?

Obviously, you've lost some shelf space for Class A. But I guess what's your comfort level in recapturing that longer-term?

Well, I think, let's be honest, I think any time you lose market share, it's not an ideal situation and it takes some work and some cost to get that back.

So I don't think anybody here at Winnebago is overly pleased with some of the retraction of our Class A market share.

Now, there are several factors to that.

One is our competitors are being extremely proactive and aggressive in terms of some of very aggressive price points within the Class A gas segment.

Winnebago historically has not been known as the, probably the low-cost leader from a manufacturing standpoint.

And we have continued to try to provide great value in our products and high quality.

And so that market trend, driven by our fierce competitors, to offering increased value on the lower price points of Class A gas is something organizationally that we're trying to figure out how to respond to in a profitable way.

The second element to our Class A erosion is certainly due to some of the transition related between opening the Oregon facility.

Our diesel strategy is in a state of transition right now.

We have some diesel models which certainly have great value in the market and our customers enjoy using.

But we have significant plans to upgrade and refresh our diesel lineup going forward and as we transition some of those products out of Forest City into the Junction City plant, there will be a period of time where we're just not able to serve the market from a quantity standpoint as well as we probably historically have.

But the long-term story here is very positive with Junction City.

It has benefits in many ways.

It hopefully will provide us certainly increased capacity that will focus on Class A diesel, but as my comments in the call indicated, we are more and more talking about whether there are other products in our portfolio that could benefit from being made in parts of that campus.

We have the rights to the Country Coach brand, which at this point, we've not announced any intentions with that, but there's certainly work under way to determine opportunities to optimize that asset that we acquired.

And we will be able to, in the future, backfill the hours in Forest City that were previously tied to diesel products with the production of other products, most likely Class A gas and Class C.

But I want to be clear: we are increasing our emphasis internally here at the Company on driving organic capacity.

And what I mean by that is the execution of continuous improvement activities, more efficient manufacturing processes, the taking out waste so that with the same amount of resources and same amount of square footage that we currently have, we can increase our output and I think we started to see a little traction there in our third quarter and we hope to drive much mores facilities like Lake Mills, like Charles City and even here in Forest City.

We have the ability to get more units out here.

We just have to be more active in terms of driving waste out and productivity up.

And I'm excited to see our employees responding to that challenge.

Thanks for the color.

Then just one final question.

On towables side, given the growth we've seen there for the past, call it two years, where are you from a capacity standpoint right now in towables?

We have significant capacity left with our existing facility.

I would tell you, our ambitions for that business certainly exceed the capacity we currently own.

But I would tell you right now, for the next several years, we think we have the capacity, we know we have the capacity to drive our shares up significantly.

So that's an active topic, one, as I've come into the Company, that I've asked.

I want to make sure that we're providing that business unit the resources to grow.

But that we don't overbuild too quickly, that we utilize the capacity we have and then appropriately time any expansion needed.

But we, again, we have capacity there and we plan on filling it and finding ways to make more units in the future when we reach that point.

All right.

That's it for me.

Thanks for the color, Mike.

Thank you.

Thank you.

Our next question comes from the line of Tristan Thomas with Sidoti & Company.

Your line is open.

Good morning.

Good morning.

Good morning.

I just had one quick question for you.

I was just curious, with the industry really benefiting from the first time buyers, when do you expect they'll return to the RV market for their second purchase and then what do you do, specifically, to make sure you capture that?

That's a great question.

First of all, I think the answer to your first question is it probably depends on what they buy.

We are excited to see more millennials entering the market.

I think there was an article in the New York Post recently on that regard.

Obviously, those customers probably have a little less discretionary income than maybe somebody on the more experienced side entering the market.

And so therefore, they're probably gravitating to some of the lower priced units or starting in the towables category and growing up.

I will tell you, though, I think one of the reasons why the Class B segment is growing overall in the industry and within Winnebago is that some of those first time users are looking for a different type of product to be more mobile.

They're not looking to take the product and set it at a campground for two weeks or two months.

They want to go biking or kayaking or hiking and they want a compact unit that can get to a site that's close to where their outdoor activity is.

And so I haven't been in the industry long enough, Tristan, to fully understand some of the product life cycles, but we will work aggressively here to, first of all, serve them with a high-quality product and a high-quality service experience in combination with our dealers, but as we gain their information through retail registration and other means, we will work to create both an emotional bond with them in terms of their experience, but also let them know what other products are available for them to step up.

But I'm sure we have more work to do there.

That's a great question and one I'm glad you raised.

Another maybe quick comment on that.

There is a lender survey that the RV industry provides and you have some key financial lenders that put together quite a bit of RV-specific information.

And one of the things that we've looked to maybe approximate how long people own their units, so it might not be their first one, but it's a stat on how long that loan is on the book.

And so over -- it definitely has moved from different points based on growth and contraction, but a lot of times, a lot of the history we've seen is in that four to six year time frame.

But that's kind of an average across the spectrum and that's focused on new loans and have a lot of use activity going on out there as well.

So there's a lot of ways to evaluate this and -- but yes, good question.

Okay.

Just one other quick question.

With not doing the dealer event, what are you allocating those marketing dollars for?

One of the things that we did inside this third quarters was a council meeting event with key dealer partners and a couple other things have been playing out.

We also touched upon, in our prepared remarks, the brand vitality study that's going to be done here in our fourth quarter.

So, it's a collection of different items that we're looking to shift those dollars to.

And I would say in the future, and Sarah and Don here in the room have certainly more experience about the formal ways that we've engaged our channel partners, but I would say the dealer days event was potentially a pause.

Now, we're not saying that we will or we won't have a similar event in 2017.

But I think the team felt for 2016 that we could take a break from that.

We are increasing our presence at the open house in Indiana later this fall.

That's growing as an important event.

But we are taking a step back and re-evaluating, especially with our towables division growing, how we can engage our dealers either together or separate in some ways.

And our competitors do any number of activities themselves and dealers' time is sometimes split between ourselves and some of our competitors.

But it's a topic that we continue to discuss here and we'll give you an update in the future as to some of the strategies that would require material investment.

Okay.

Thanks.

I look forward to those future updates.

Thank you.

Our next question comes from the line of Matthew Paige with Gabelli & Company.

Your line is open.

Good morning.

Do you have what your towable sales would have been on a same-store basis?

No, that's not information that we would have historically or in the future publicly share.

Okay.

But could you speak to maybe the number of distribution points that you have on the towables side of the business?

Well, from the standpoint of what's evolving there, as Mike touched upon, there's a couple ways that we're approaching it.

It's a combination of having the right coverage of our product categories and physical dealer locations.

And so inside the quarter, and inside this past year, we've been expanding upon those, both to ensure we have adequate representation geographically and on a product basis.

So that's been a catalyst for our growth and when you look at it on a percentage basis, we're talking double-digit increase inside the year and those would be maybe some of the key things I would highlight in relation to the dealer location side.

One other thing I'll add is, and I think your question ultimately gets to this, is we are very carefully watching retail velocity and dealer inventory in turns on the towables business.

And I guess one of the good things about being one of the emerging brands and players in that space is that we are finding more outlets and for folks, dealers, to take product.

That being said, we want to make sure that we manage an appropriate level of turns in that business.

The motorized side has tended to be more in the two range and towables maybe more in the two, two and a half range and we're probably on the higher side of that number a little bit.

But I think we definitely want to make sure that our retail increase continues to exceed our field inventory increase.

And so that we ultimately increase our turns as we grows this business, because that's not just good for Winnebago, that's ultimately good for our dealers and hopefully advantages us if we can create that retail velocity in the market.

Okay.

And then maybe changing gears a little bit.

Now that you spent, like you said, about five months on the job, could you maybe define some of what your cash flow priorities are and where do acquisitions potentially fit in, especially as you look to grow the towables business?

Well, no, that's a fair question.

My comments obviously talked about being pleased with the strengthening balance sheet that we have here at the Company.

It was good to begin with when I joined the team in mid-January.

Arguably, appropriately conservative, given the cyclical nature of the industry.

That being said, we need to be very focused on generating positive strong cash flow so that we can build up a reserve of at a minimum cash there that we can use to profitably fund growth in the business.

We've also been very conservative on the long-term debt side, almost non-existent, if not non-existent currently, and we certainly have explored some conversations out of my curiosity to, and externally and internally, to understand what level of appetite there would be if we wanted to tap into that from a capital access as well.

But the arrival of our new vice president of strategic planning and business development certainly signals that we're going to spend some more time at this Company trying to get ahead of the business.

We do have ambitions to grow within the industry, certainly I'm intrigued, potentially, by whether some of our core competencies would extend outside the industry as well.

But the work there is very early and we want to be in a position with our balance sheet to be active.

I'd like to preferably be proactive and find the right opportunities as opposed to being reactive and, as many of you know, when you're reactive at times that's a different situation in terms of the value you can sometimes get on external opportunities.

So stay tuned.

Obviously, we can't comment on some of the specific things we're thinking about.

But just, we are looking to grow.

All right.

Well, I appreciate the time and hopefully see you guys later this year.

Thank you.

Thank you.

Thank you.

Our next question comes from the line of Morris Ajzenman with Griffin Securities.

Your line is open.

Follow-up on, during your presentation, you spoke about Class A diesel would be fully ramped up by the end of FY17.

What quarter during FY17 do you think you'll start deliveries to dealers?

Well, I think it will start at a little bit of a trickle pace in the first half of the year.

As I said, we have some pilot units coming off the line currently.

I'm not going to share specific numbers but that's a low amount as we try to build a robust manufacturing and assembly process.

The back half of the year is where we hope that production starts to ramp up and I would tell you that probably the fourth quarter is where you would see more significant volume.

Now, that all assumes that our operations team continues to do a good job in building the supply chain and building the assembly value chain.

But when we say we're going to ramp up to a robust schedule, that doesn't mean that's the most we'll ever make out of that facility.

That means that we've got a target in our mind for a certain number of units that we hope to be producing and then they all have to go through a ship-out process to make sure that they're ready and of high quality to release to the market.

Those numbers, in a project like this, are fluid and the timing is fluid.

But, we are committed to trying to create an impact in this business probably late in the FY17 and we will keep you updated as to our progress there.

Thank you.

So then for the next four quarters, how do you position yourself in your current Class A diesel offering?

What do you do in, I guess, this difficult environment by not having product, et cetera, et cetera?

What's done strategically over the next four quarters?

Let me be clear.

We will still have some product.

We are still making diesels here in Forest City.

Some of the products that we started to make here in Forest City are first in line to move out and I'll give you an example.

Our Winnebago's business in the 45-foot category has been almost nonexistent in the past and we just recently had started to make some of those here in Forest City.

Those will be moved out to Junction City.

And so we're really just beginning that journey.

But some of the other smaller diesel units, we have inventory here on the campus.

Production continues here.

But we're trying to certainly time the manufacturing transition between Forest City and Junction City to not significantly impact that market.

But our team is working closely with our channel partners to tell them what we have available.

But we're also working with our channel partners to tell them what our ambitions are and what our product development engineers and our product managers are working on for the future.

So it's not extremely steady state, but we are very optimistic about what the end game is here.

And the current 45-foot offering, diesel offering, is it where you want it to be as far as the product that's being offered currently to dealers?

Is there still work in progress as you switch over to Oregon?

How does that SKU play out?

The 40-foot floor plan that we have shared with the retail market at a couple different venues and started our path here in Forest City is, it's a product that we are very excited about and so I think the context of evolving our diesel strategy is looking at some of the segments even beyond that price point where we don't currently have any existing products and also capitalizing as we get the facility in Oregon up and running in regards to having the production and the assembly process really fit the exact needs of this product as opposed to some of the challenges we face in the Forest City campus with size limitations, et cetera.

I think there's opportunity in new segments for us.

What we are currently offering into the marketplace, where we have a lot of price points that we're hitting and covering.

And it's an ongoing product development opportunity, plus in the existing floor plans and price points that we have product for and these segments that we don't currently have any products.

One last question.

Switching gears here.

This is for you, Sarah.

The G&A when you make the adjustment for the $2.75 million Australian settlement, looks like year-over-years was up mid-teens.

First, am I correct on that?

It's just a simple mathematical calculation, here.

And secondly, if I am, why was it up that much and how will it be going forward?

As I highlighted in my opening remarks, our ERP from expense in the quarter is up on a year-over-year basis approximately $1.1 million.

And so that mitigated quite a piece of the legal settlement.

So those were the two most sizable items, positive and negative, affecting G&A.

Separate from the G&A side, obviously last year, we had the impairment of a fixed asset and some other non-cash expense.

That was separately highlighted.

But, ERP is the big driver for the year-over-year distinction.

And will that continue in the next few quarters?

Well, we are working very hard in regards to that whole project.

And as I highlighted, made significant investments in the past year and a half and the project is still going to continue on into FY17, as we've shared previously, and we're looking at the latter half of 2017 to be when all areas of the process are alive and operational.

So yes, there still will be continued expenses associated with this, both capital and immediate expense in the coming quarters.

Thank you.

Thank you.

Thank you.

And that is all the time we have for our Q&A portion of today's call.

I'd like to turn the call back over to Don Heidemann for any closing remarks.

Thank you for joining us today as we reviewed our third-quarter financial results.

We look forward to speaking with you again in the fall when we review our fourth-quarter and FY16 year-end results on Thursday, October 13th, 2016.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude today's program.

You may all disconnect.

Everyone, have a great day.