Winnebago Industries Inc (WGO) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Winnebago first-quarter 2017 earnings conference call.

(Operator Instructions).

As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host for today, Ashis Bhattacharya, Vice President of Strategic Planning and Development.

You may begin.

Good morning, everyone and thank you for joining us for Winnebago Industries' conference call to review the Company's results for the fiscal 2017 first quarter, which ended November 26, 2016.

I am joined on the call today by 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 later today.

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

Before we start, I'd like to remind you that certain statements made during today's conference call regarding Winnebago Industries and its operations may be considered forward-looking statements under 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 SEC filings, which I encourage you to read.

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

Mike.

Thank you, Ashis.

Good morning, everyone and happy holidays to all.

Winnebago Industries' fiscal 2017 first quarter will be remembered as one of significant change in the right direction for the Company.

I will begin this morning's call with an overview of the key performance drivers for our first quarter and then Sarah Nielsen will dive deeper into the details of our Q1 financial results.

We are off to a strong start in many ways in fiscal 2017 as we continue to implement our plan to transform Winnebago Industries, ultimately looking to improve our competitive position in the marketplace and drive new levels of growth and profitability in the future.

Our results from the first quarter demonstrate our continued momentum on this path, especially the announcement and close of the acquisition of Grand Design RV that happened within the quarter.

This quarter also additionally reflects our desire to both maintain ongoing important investments for the Company's future and further clean the slate in terms of legacy policies.

At the end of Q1, we delivered strong revenue and net income growth while margins remained steady.

Consolidated revenues were $245.3 million, an increase of 14.5% year-over-year, driven primarily by strong growth in our towables business.

During the quarter, we successfully completed our transformative acquisition of Grand Design, which significantly expanded our penetration within the attractive, still growing towables market segment.

Our top-line results benefited from approximately three weeks of Grand Design sales, which contributed $25.8 million of revenue.

With the Grand Design acquisition now complete and given the organic strong growth of our Winnebago-branded towables business, we are now reporting our financial results on a segment basis broken into two segments -- motorized and towable.

In our towable segment, the consumer demand for towable RVs remains strong contributing to solid results for both Winnebago and Grand Design-branded products.

Our Winnebago-branded towables business continued its upward trajectory with organic growth of 44% year-over-year in the quarter.

During the quarter, we saw solid growth in Winnebago-branded retail unit numbers as well, well above 50% and we continue to see an increase in healthy backlog looking forward.

Customers have responded particularly well to our new Winnebago-branded towables product offerings, including our entry level Winnie Drop travel trailer, which has shown specific appeal to younger, more active customers.

This strong demand is welcomed as we continue our progress in expanding the quantity and quality of our Winnebago-branded towables dealer base.

We continue to increase that network resulting in more units on the dealers' lots.

The strength of our Winnebago-branded lineup was on display at this year's RVIA show in Louisville, Kentucky in November where one of our Voyage models of fifth-wheel trailers were formally recognized as a hot new product.

On the Grand Design side, we continued to see very solid shipment in retail momentum.

That team had a fantastic open house event in September in Indiana followed by excellent showings at RVIA in Louisville and at retail events this fall in Hershey, Pennsylvania and Pomona, California, showcasing the new interior and exterior updates to the Solitude lineup, which have been received well by dealers and end-customers alike.

The Imagine line of Grand Design travel trailers is gaining momentum as well and we have just moved into a new production facility in Indiana, which will increase capacity by 75% for the Imagine line and gives a little breathing room as well to the other products in their own manufacturing facilities.

We continue to feel as if we can keep up with the strong demand expected in the future in the Grand Design RV business.

I am also especially proud of the Grand Design team for receiving the 2016 RVDA Dealer Satisfaction Award, which they have won every year since their organization was founded.

Overall, the towable market segment has experienced rapid growth over the past several years.

We expect this upward trend in the industry to continue and look forward to being even better positioned to compete in this growing market with the addition of the Grand Design portfolio and the emergence of the strengthening Winnebago line.

Turning to motorized, revenues declined in that segment slightly year-over-year in the quarter primarily reflecting the impact of our decision to exit the aluminum extrusion business in 2016.

Motorized retail registrations on a unit basis achieved near double-digit growth for the quarter and toward the end of the quarter, we were encouraged by the material improvement in retail registrations and backlog for the Class A gas productline.

While this growth remains below industry levels, we are continuing to introduce new models within our current opening price point series, the Vista.

We received strong positive feedback from our dealers during the Louisville event and are accelerating plans to improve our Class A value with even newer product in the future.

Our Class B and C productlines continue to be where the traction within our motorized segment is from a shipment standpoint with strong new additions to our Class B line in particular.

Our Winnebago Paseo is the latest addition to our marketshare-leading Class B catalog.

Built on the Ford Transit van chassis, the Paseo further elevates our market position, featuring off-the-grid camping capabilities and an innovative floor plan.

We also recently unveiled our Winnebago Era product, which is an industry first in featuring a slide room that houses a standard-power Murphy bed that folds down as needed to form a continuous sleeping space.

Overall, we are working hard to ensure our motorized products meet evolving customer trends and are committed to delivering more consistent levels of product, quality and service to build on our recent retail momentum.

Our backlog on motorized, while still down from a year ago single-digit percentages, was significantly healthier at the end of Q1 F2017 than at the end of Q4 F2016 where we faced a 30% negative deficit.

Gross profit overall for Winnebago Industries was steady for the quarter; however, we are confident that we will realize the increasing benefits from the profitability of the Grand Design line in future quarters.

We will also continue to gain strategic sourcing traction and execute on our new operational and excellence initiatives.

With that initial overview, I will now turn the call over to Sarah Nielsen who will review our first-quarter fiscal 2017 financial results in more detail.

Sarah.

Thanks, Mike and good morning to everyone.

Year-over-year, first-quarter consolidated revenues increased nearly 15% for the quarter or $31.1 million, driven primarily by three weeks of Grand Design revenues, as well as a 44% increase in Winnebago-branded towable revenues.

First-quarter operating income was $18.4 million, up over 44%; net income was $11.7 million, which increased 37%; and diluted earnings per share of $0.42 improved 31% over the prior year.

As illustrated in our consolidated statements of income, there are a number of significant items positively and negatively impacting our first-quarter fiscal 2017, which I would like to cover in more detail, as well as provide context as to how these items will impact our financials going forward.

The first significant item relates to post-retirement healthcare.

Over the past 15 years, we have made many changes to this program as it was a significant unfunded obligation and as a result, we have also had numerous communications with our plan participants throughout this timeframe.

That brings us to this fall where we announced the final termination of the plan to our retirees and participants.

Our decision to terminate this plan effective January 1, 2017 resulted in a post-retirement healthcare benefit of $12.8 million or $0.31 per diluted share net of tax compared to a prior-year post-retirement healthcare benefit of $1.3 million or $0.03 per diluted share net of tax.

The expected final impact of the plan termination to the remainder of fiscal 2017 is an additional $12 million of post-retirement healthcare benefit income in our second quarter.

After February 2017, the plan termination will be entirely recognized in the financial statements and there will be no further prospective income statement or balance sheet impact.

Also significantly impacting the quarter were a number of Grand Design acquisition-related expenses.

First, we incurred $5.5 million of transaction costs related to the acquisition that were immediately expensed, or $0.13 per diluted share net of tax.

We also incurred debt issuance costs of $10.8 million as illustrated in our cash flow statement that were capitalized and will be amortized over the life of the associated credit agreements.

Note that these costs are presented on our balance sheet as a net reduction to the outstanding debt.

We expect that we will incur additional transaction-related costs in our second quarter as we complete the required associated SEC filings, but don't anticipate that these remaining costs will be material.

Based on the allocation of the purchase price to the net assets acquired and the liabilities assumed using outside valuation experts, we established intangible assets with definite lives of $105 million, which included dealer network, outstanding backlog, noncompete agreements and a favorable leasehold interest.

The useful lives range from less than one year for the backlog to 12 years for the dealer network.

Amortization expense related to these intangibles was $2.1 million in the quarter or $0.05 per diluted share net of tax.

The remaining amortization expense to be incurred in fiscal 2017 is $22.6 million, which will be heavily weighted to our second and third quarters due to the accelerated amortization of the backlog.

Lastly, interest expense of $1.1 million or $0.03 per diluted share net of tax is related to the newly-established asset-based loan and term loan agreements as we borrowed $353 million on November 8 to fund the acquisition.

All of the debt under the ABL and the term loan are currently at variable rates based on LIBOR, which were 2.4% and 5.5% respectively during the quarter.

We are providing non-GAAP performance measures in our press release today of EBITDA and adjusted EBITDA as a comparable measure to clearly illustrate the effect of all the items I just reviewed.

Such non-GAAP financial measures should not be considered superior to, as a substitute for or as an alternative to the GAAP financial measures presented in the news release.

Thus, on a comparable basis year-over-year, adjusted EBITDA was $14.7 million compared to $12.8 million last year, an increase of nearly 15%.

As Mike mentioned earlier, we have begun reporting segment results for the motorized and towable segments as we reevaluated this topic given the Grand Design acquisition and the growth of our Winnebago-branded towable business.

We have always presented a fair amount of motorized and towable data and will now add adjusted EBITDA as our main measure of operating performance.

With respect to the motorized segment, motorized revenues were down a little over 1% year-over-year reflecting the impact of the Company's exit of its aluminum extrusion business to outside customers, which reduced revenues by $5 million in the quarter.

Total motorized deliveries rose 4.1% year-over-year with the mix shifting towards Class B and C products.

ASP for the quarter declined 2.9% reflecting this mix shift.

Segment adjusted EBITDA was down 14.5% on incrementally higher expenses related to workers' compensation and costs associated with ramping up the new Oregon production facility.

From a towable standpoint, revenues rose nearly 200% year-over-year on the addition of $25.8 million in revenue from the Grand Design acquisition.

As we have previously noted, on an organic basis, Winnebago-branded towable revenue grew over 44% in the quarter.

Towable deliveries grew at a rate in excess of recent industry trends as a result of the greater penetration of our new products and further expansion in our distribution base.

We believe we can continue to achieve growth in excess of the overall towable market projections for the remainder of fiscal 2017.

The addition of Grand Design resulted in a nearly 20% higher ASP in the quarter primarily due to a greater proportion of higher-priced fifth-wheel units.

Towable segment adjusted EBITDA was $4.7 million, which increased by $3.6 million over the prior year.

Turning to our balance sheet, you will see several changes in Q1 related to the Grand Design acquisition and benefit plan termination.

As compared to our year-end balance sheet, total assets increased $492 million due mainly to the addition of $500 million in goodwill and intangibles associated with the Grand Design business, $48 million in inventory and accounts receivables acquired offset by cash paid of $60 million.

The main liabilities established due to the acquisition includes short-term debt of $7.6 million, accounts payable and other short-term liabilities of approximately $20 million, warranty reserves of nearly $13 million, a deferred tax liability of over $10 million and long-term debt of approximately $335 million.

Lastly, long-term liabilities declined $7 million due to the post-retirement healthcare plan termination.

Before I conclude, I want to recap just a few items.

We will see one more quarter impacted by our termination of the post-retirement healthcare plan.

In the second quarter of fiscal 2017, we expect a $12 million benefit related to this line item.

Our amortization expense for the remainder of 2017, as I previously mentioned, is expected to be approximately $22.6 million, which will be weighted most heavily towards the second and third quarters.

Beyond fiscal 2017, we expect amortization to be roughly $8 million annually through 2021.

Our baseline expectation for interest expense for the remainder of the fiscal year, which includes amortization of debt issuance costs, is between $15 million to $16 million, which, of course, is dependent on interest rates and the amount of debt paydown during the year.

The overall effective income tax rate for the first quarter of fiscal 2017 was 32.4% compared to 33.6% for the same period in fiscal 2016.

The decrease in effective rate is due primarily to a reduction in the liability for an uncertain tax position related to a favorable resolution of a state tax matter during the quarter.

We anticipate that our annual effective tax rate for the remainder of the year will be close to 34% when considering the accretive impact of Grand Design to our overall consolidated results.

This concludes my review of our quarterly financials.

I will now pass the call back to Mike for some final comments.

Thank you, Sarah.

Before we turn to the Q&A section, I just wanted to take a few moments to highlight the progress we have made toward bringing to life someday our strategic visions and some of the exciting initiatives we have in store for the remainder of fiscal 2017.

Make no mistake, 2017 will be a significant bridge year of sorts.

There are lots of moving pieces happening at Winnebago Industries.

We have a large new business in Grand Design to integrate, many new leaders to assimilate, a new ERP system to continue to implement, a new West Coast manufacturing location to ramp up, operational excellence initiatives to start, new product development, which must accelerate and many, many, many more areas to improve.

But we do believe that we are putting the Winnebago train back on the tracks and moving productively forward, hopefully in a net positive way.

Across the organization, our focus has been on aligning the entire team around a common vision of becoming a leader in outdoor lifestyle solutions.

This will permeate our entire organization and drive us to provide our customers with a truly unsurpassed experience in the future.

Within the RV industry, we will strive to provide the best overall experience to our channel partners and end customers even if we are far from the biggest manufacturer.

We will, however, also give ourselves the permission to add profitable growth streams to our portfolio in the future if they fit the lenses we are beginning to develop from a new business development standpoint around the outdoor lifestyle arena.

You have also heard me speak before about our desire to build a performance culture at Winnebago, one with greater accountability and passion to drive out waste, but constantly increase and create customer value.

This starts with a strong leadership team, which has been in transition since earlier this calendar year.

In this first quarter of 2017, we added not only strong operating leaders in Don Clark and Cam Boyer from Grand Design RV, but also the strategic advisory services of Grand Design's co-founders, Bill and Ron Fenech.

Our industry-specific talent has grown immensely.

In addition, we recently welcomed two other new Winnebago executive leaders in Jeff Kubacki, Chief Information Officer and Chris West, Vice President of Operations.

Jeff will be instrumental in modernizing our IT infrastructure, co-leading our ERP project to successful implementation, building a business intelligence culture and working with engineering on technology that faces the customers and betters their experience.

Jeff has already developed strong instincts about the necessary improvements to increase the probability of success with our ERP project and increase its future positive impact to the business.

Chris West has responsibility for Winnebago-branded manufacturing, supply chain, quality, safety and lean value streams.

He has immersed himself quickly in the unnecessary complexity of our legacy manufacturing operations and has launched several operational excellence initiatives already.

We will look to drive higher levels of manufacturing productivity, efficiency, quality, safety, employee satisfaction and margin enhancement in the future.

Our West Coast manufacturing and service startup continues and we have begun actual production of the first line of diesel products that have been initiated in Oregon.

We will make the investments needed to set that plant up correctly and drive quality in the products that are made there.

These talent additions are necessary to deliver our future incremental results and all the new executive leaders are acutely aware of my direction about funding change and delivering a return on investment of their own services.

Now quickly let's review the Grand Design status.

This acquisition strengthens Winnebago culturally, strategically and financially.

Culturally, Grand Design brings a similar passion for how to serve our customers with high-quality products and a customer service experience that exceeds expectations.

Strategically, the acquisition demonstrates Winnebago's commitment to enhancing its relevance and share in the towables market, broadening our product lineup and our dealer relationships.

Financially, Winnebago will ultimately become at least 40% larger and materially more profitable, especially so after first-year transaction expenses and purchase accounting items happen.

This addition of Grand Design provides Winnebago with an opportunity to continue to fund overall change in our business and concurrently provide our shareholders with a greater return.

The integration of Grand Design is well underway.

Teammates from both sides are focused on the following areas -- financial reporting, strategic sourcing, IT and human resources.

We are doing the work necessary to build the needed connections between Grand Design's new parent, Winnebago Industries, and Grand Design.

But we are also being very careful to further empower and enable Don Clark and his team to continue their upward and impressive momentum in the market.

The Grand Design team is already bringing immense energy to the Winnebago culture and we are looking forward to foster the sharing of best practices as appropriate while taking further advantage of our increased scale, talent and customer confidence.

Dealers are very excited about the future for Grand Design and they won't hesitate to weigh in with Winnebago Industries if they feel the Grand Design business model is threatened in any way.

As I mentioned earlier, the RVIA show recently concluded and both Winnebago and Grand Design had strong showings.

Anecdotally, the feedback from the dealer community is that all recognized change is happening at Winnebago Industries and that we are headed in the right direction to ultimately better serve their needs.

We have much, much work to do to continue to earn their business and we are committed to seeing our dealers succeed.

For the balance of 2017, we will remain focused on driving increased profitability, net the expenses from the Grand Design transaction.

We now have a company with greater scale, a more balanced portfolio, another strong brand, a strengthened leadership team and a resolve to deliver increased value to our shareholders in the future.

We have set the foundation for consistent execution against the following long-range strategic priorities, which will guide us for 2017 and beyond.

One, we will continue to invest in our future by strengthening our core products, look for additional ways to leverage our strong brands and investigate expansion into new markets.

Two, we will explore new ways to further build our performance culture and instill operational excellence and discipline across the organization.

And three, we will do all of this with a common focus on providing dealers and end customers with the highest levels of quality and service, which leads to a great experience and lifetime brand advocates ultimately resulting in long-term value for our shareholders.

Now before I open it up to questions, I would like to end by thanking all of our employees at Winnebago Industries for their hard work during the quarter and also welcome the Grand Design employee team to our family.

I'd like to thank them for again their hard work, wish them a very merry Christmas and a happy holidays I would also like to thank all of you for your time today and wish you happy holidays as well.

I will now turn the line back over to the operator for the Q&A session.

Thank you.

Thank you.

(Operator Instructions).

Craig Kennison, Robert W. Baird.

Good morning.

Thanks for taking my questions and thanks for the detail in the press release.

On Grand Design, can you share with us how accretive it was to GAAP earnings during the three weeks that you owned it and can you project for us any expectation for the accretion in fiscal 2017?

Good morning, Craig.

From a Grand Design standpoint, now that we have incorporated the segment disclosure, it's going to be a combination of the two.

And as we highlighted, from a revenue standpoint, we saw the strong impact to our quarter just with three weeks of that flowthrough.

And from an overall towable standpoint, as we shared from an adjusted EBITDA standpoint, we had very strong growth in that segment year-over-year and a significant component of that was certainly on the Grand Design side of the fence, but still great performance from our existing Winnebago-branded towable performance as well.

So from that standpoint, there's a significant amount of business combination disclosures that we will be filing when we release our 10-Q, which is planned for next week, but the critical information and the framework that we will use on a go-forward basis, we will be breaking out the two segments as we shared this morning.

Okay, thanks.

Mike, you've talked about working on unlocking trapped capacity in your business.

Could you first talk about some of the things you are doing to unlock that capacity?

And then second, to what extent is capacity an issue for you as you move forward?

In other words, are you unable to ship as many products as you would like to based on some of that capacity constraint?

Good morning, Craig.

I will start with probably the second half of your question.

In my opinion, at the current time, capacity is not an issue for the motorized side of our business.

We are more focused on ultimately driving increased demand, which has to happen in that business.

With the addition of our Oregon plant, which is coming out of the gates here concurrently, as I mentioned, with production of the first set of diesel models that are moving out there, we have less and less concerns about future capacity on motorized.

You asked about some of the reasons maybe I feel confident that we can unlock capacity in motorized in the future and I will just mention a few of them and try not to get into the weeds.

But there are material inefficiencies that are happening within the manufacturing process at Winnebago that don't allow us to realize our potential on a daily basis from an output standpoint.

One of those items, as an example, is missing parts to the line.

Now, ultimately, we believe we get the product right, but we have too many instances where the important assembly teammate at Winnebago does not have all the parts they need to complete their task in the station that they are working on and that work then is either passed further down the line or it has to be completed in a rework loop of sorts at the end of the process.

And that's just one example where if we can dramatically cut down on the missing parts within the assembly line process, we can dramatically increase efficiency on the line and output.

The other element -- and again I won't get into details -- is there's probably higher-than-average turnover in certain aspects of our manufacturing environment.

We'd like employees to join Winnebago Industries and spend their entire career, if not the majority of their career with us.

When we see material turnover within the manufacturing environment that, in my opinion, is higher than it needs to be, that leads to inefficiency in rehiring, retraining and ultimately employees that have various levels of different productivity on the line.

So those are just two examples, but as we look to really transform our motorized manufacturing and supply chain processes, there are other instances as well.

All of these will take time to improve the processes and drive the waste out, but I'm not going to sit here today and say that our motorized performance, which continues to be relatively steady and not growing at the rate that we would like it to be, that's not due to capacity issues.

We have work to do on the demand side most importantly.

And if I could, Mike, just a follow-up on that point.

You talked about some inefficiencies in the process.

To what extent do you think you can convert that into cost savings and making your product more affordable and therefore maybe win some of the marketshare battles out there?

Well, certainly, we hope that any of the savings that we find in the organization financially that we will spend that in a variety of ways, either reinvesting in the business to drive future growth or obviously dropping it to the bottom line to improve our profitability.

Our ability to compete at some of the value price points that have emerged during this RV recovery, especially in the motorized side on Class A gas, in my opinion, is probably more of a design and consumer insights challenge versus a manufacturing challenge.

I actually have confidence that we can make whatever product is needed to compete at those price points and potentially be marginally profitable there.

It's just that our team has not been on the leading edge of that trend in the last year and a half and we are starting to change that.

I don't want to overemphasize any optimism here, but this was the first quarter that we had seen positive retail in Class A gas in quite some time.

Now, I'm not suggesting that that will always happen in the future, but that's a good sign that potentially some of the work we've been doing on introducing extended and lower-priced floor plans on the Vista series are working, and I can't share details, but we realize that our existing product isn't going to be the only answer to attacking that in the future and there are certainly activities underway to increase the competitiveness of our Class A gas line in the future.

A little bit too late for my taste coming into the business this year, but nonetheless we will get there.

Thanks.

Finally, just on tax policy, have you given any thought to how you might use any windfall from a lower corporate tax rate?

Obviously, that expands, I guess, our opportunities from a liquidity standpoint, either for some of the topics that Mike touched upon strategically or we also have debt paydown priorities as well.

So I think that can positively impact us in a number of ways.

Great.

Hey, thank you.

Tristan Thomas, BMO Capital Markets.

Good morning.

Two quick questions.

Could you maybe talk about, with the inclusion of Grand Design, even though it was only for three weeks in the quarter, why was gross margin flat?

Maybe talk about some of the offsets there.

Well, we touched upon, from a motorized standpoint, that's where we saw pressure on a year-over-year basis and as noted in my prepared remarks and in the earnings release, year-over-year, our adjusted EBITDA was lower and that was primarily a function of some higher workers' compensation expenses as related to the prior year and also some costs associated with the ramp-up of our diesel manufacturing facility in Junction City, Oregon.

So those are the two key drivers on the motorized side that impacted margins and we certainly saw really positive performance on the towable side of the business.

Okay.

Kind of a two-part question.

First, could you maybe give us a timeline for the rest of the Oregon production ramp and then also for the new Imagine facility in Indiana, is that fully staffed yet?

I will speak to both of those topics and again, I will start with the second half, Tristan, this morning of your question.

The Imagine -- the new facility in Middlebury, Indiana, which the Grand Design team is now using on their Imagine travel trailers, was opened several weeks ago and they are in that facility making product and continuing to ramp their production up.

What excites us about that is that we think there is significant runway within that business overall and certainly within the Imagine line, we now have the space we need to realize significant growth in that category.

It also allows some of the manufacturing space that was previously occupied by that to be utilized now by the other Grand Design lines and so we have a little bit more room for some of the other Grand Design lines to grow as well in the future.

So with that business -- and the Grand Design team has done a good job of this through the years -- we will work carefully with Don and his team to make sure that we continue to have the capacity to keep up with their rapid growth.

From a Winnebago motorized standpoint at our West Coast facility, as I indicated, we are beginning formal production out there of one of our diesel models.

We've gotten units to dealers.

We've retailed several units and that will be a gradual ramp-up week-over-week, month-over-month throughout the year and we will certainly match that to the demand that's appropriate for the Winnebago diesel models that are out there.

I will tell you we will still have Winnebago diesel models that are still being made in Forest City for some time, including our lower-priced Forza line, which will remain in Iowa for some time here in the future.

But the lines that are out there are being moved one at a time.

We really have to make sure that in a new manufacturing environment that we get the quality right and as you can imagine, for a company that's had most of its motorized manufacturing in North Iowa for most of its life, there are certain complexities with the supply chain and moving production to the West Coast that we've needed to work through.

So, by the end of the year, we will have -- end of the fiscal year, end of the calendar year, we will have manufactured several hundreds of units out there, but that will be in a graduated ramp-up here over the coming quarters.

Got it.

Thank you.

Mike Swartz, SunTrust.

Good morning.

Sarah, sorry if I missed it, just some housekeeping questions.

Did you quantify the ERP expenses that flowed through the P&L this quarter?

They were very similar to the prior year, so it wasn't in any of the prepared items that I had highlighted earlier.

So from an investment standpoint, there is a piece that's capitalized and is a piece that is immediately expensed and this year, it was approximately $1.2 million compared to last year of $1.4 million.

So a very similar level of investment quarter-over-quarter.

Okay.

And we should expect that kind of run rate to continue second quarter and then I think it falls off from there.

Is that right?

From an ERP standpoint, as Mike highlighted, we have a new CIO that just recently joined and we are very excited to have him, one of our key leaders, working from an ERP implementation perspective as we finalize the last components of the (technical difficulty) process and each quarter, we will continue to give a reasonable update as to where we are, but from the standpoint of the goal for run rate, it should be pretty similar on a year-over-year basis at this point.

Okay, that's helpful.

And then in the expenses in the first quarter related to Grand Design -- I think it was $5.5 million -- were there any additional expenses in cost of goods related to the stepup of inventory?

Yes, there was a small amount of stepup from the standpoint of the finished good inventory that was purchased, but it was not a material amount, approximately $300,000 that impacted that first quarter of ownership and that's now behind us.

Okay.

So there won't be any of that going forward?

That's correct.

Okay.

And I did hear you say the ongoing piece of amortization related to Grand Design will be $8 million a year?

Yes, that was the out years starting after 2017 and inside the remainder of 2017 in this fiscal year, that's an important piece I just want to make sure is clear because we have a lot of expense yet to be incurred in Q2 and Q3 notably, well in excess of $10 million a quarter.

And so for the full year, we will be almost $25 million of amortization expense.

By Q2, it will tail off to a little over $2 million and that's a function of the backlog intangible that was established that has a very, very short life.

So it really just is amortized within just a few quarters.

Okay.

That makes sense.

And then just from a CapEx perspective, how do we think about that in 2017 and beyond?

I know you've still got some of the ERP costs coming through.

You've obviously got Oregon in there, incremental CapEx from Grand Design.

So how to think about that, I guess, 2017 and then I guess what's a normalized rate going forward?

That's a really good question and each quarter, as we file our Q, we update our range, if you will, in relation to what we anticipate the year to look like.

And you can see in our cash flow where we've started this fiscal year.

We are looking at the total year to be in that range of $15 million to $17 million, but that is always going to be dependent on how quickly or slow we are to approach each project that we have on the docket.

And it is a combination too of incorporating from a Grand Design standpoint if that incrementally changes anything on a go-forward basis.

That's the thought process that we have right now of the level of investment, so we will continue to keep updating that each quarter as we have better visibility on a go-forward basis.

To your point on -- there is a certain amount of maintenance spend and then there are the investments in specific projects.

So, historically, we had prior -- and this is going back quite a few years now -- but we would have a depreciation expense that was similar to what we would be investing on an annual basis and we are certainly not at that equilibrium at this point, but once we have all of the big projects near to completion then we will have a little bit more of a normalized flow to be talking about going forward.

Okay.

Then just a final question maybe for Mike and this was your first RVIA event since you've come over to Winnebago.

Maybe just curious your thoughts on feedback from dealers on product, etc., strategy that you could highlight for us.

Yes, it was my first RVIA event in Louisville.

It was good to be there and to understand some of the dynamics within that particular tradeshow.

I will try to be as objective as possible, but we feel very positive about the dealer sentiment towards our Company right now.

We have a lot to improve on and our dealers are very good at telling us what we can do better, but I think our dealers, both on the Winnebago side, but on the Grand Design side as well, are seeing a company that's on the move and one that is going to compete feverishly for their business in the future and will hopefully deliver them even better products and hopefully for them improve profitability in the future.

So we are having some very good conversations with dealers at multiple levels in their businesses, whether it's the principles, the general managers, sales or service managers and we feel that a general sentiment is that the dealer base is optimistic about where Winnebago is headed.

Now, to be fair to the dealers and to ourselves, we need to deliver on our ambitions and the things that we are talking about and I think the Grand Design acquisition in Q1 of F2017 was a pretty important proof point for them emotionally that we are willing to make the investments we need to compete more effectively in the future in this industry.

And the Grand Design business is a healthy business.

They have a wonderful set of dealers as well and their dealers are optimistic about Grand Design and cautiously looking towards Winnebago to not only I guess support Grand Design, but to make sure that we don't negatively impact the way they go to market and that's our intention is to continue to empower that team.

So I was pleased with the quality of the conversations.

I could highlight certain spots.

In terms of product, our towable line on the Winnebago-branded side is getting better.

Our fifth wheels are up more than the industry average, but we have significant work to still do there.

Our travel trailer line though has a lot of momentum on the Winnebago-branded side.

The Winnie Drop, the Minnie franchise, Micro Minnie, Minnie, Minnie Pluses, those are all doing very well.

On the motorized side, as I mentioned earlier, we walked away very pleased with the amount of orders that we took on our Class A gas Vista series and I know we've been battling and not winning in that environment and we can't do anything about the past, but we are starting to show some signs of life there that we hope in future calls that you will see some of the financial traction from too.

So lots of constructive criticism, but I think generally we feel as if our dealers are standing behind us as we start to make this change.

Great.

Thanks for the color.

Seth Woolf, Northcoast Research.

Thanks, everybody, for taking my call this morning.

Mike, maybe wanted to start with you.

A bigger picture question, but as we think about the robust growth you are seeing in the Winnebago-branded towable segment, obviously, there is a lot of opportunity there and then think about that in respect to your commentary about Forest City production where you think there's an opportunity to really expand motorhome production, is the Oregon facility, is it motorhome only?

Would it be suitable to do some towables out of there because it seems like West Coast production is at such a premium right now on the towables side?

Just any thoughts there?

Seth, first of all, good morning and thank you for your question.

It's a good question.

It's a topic that we continue to talk about all the time.

The strategy certainly started out last fall even before my arrival at the Company.

It had a twofold objective in Oregon.

It was to have a manufacturing environment where we could create high-quality diesels, especially those that are a little bit longer in length than our current infrastructure in Iowa is able to handle and we are still very committed to Junction City, Oregon being the primary home of most of our diesel line in the future.

Now, that being said, I think as we've stepped back and looked at our motorized production strategy in Iowa, we've said we can probably keep a few of our diesels a little bit longer in Iowa because of the quality of work that's happening.

Another change I think in the tenor of our conversations and probably something I've pushed to the team is this facility could be used in the future for other things and I will just tell you very honestly on this Wednesday morning that we've made no commitments to bring other lines of product out there, but I think mentally we are thinking about those possibilities differently than we were a year ago.

And whether it's other lines of motorized product that make sense for that facility or it is any of our towables line, I think we will take those on a case-by-case basis.

At the end of the day, two things are paramount.

One is we have to make high-quality product and two, we have to make money.

And I guess if the team can prove that that facility can be accretive in quality and profitability with other non-diesel lines then we will take a look at that.

As you all know, there is significant business down out on the West Coast.

Even the state of California hasn't completely rebounded from where it was at the prior peak.

So there's probably a little bit more runway even there, but I think we have a more open mind there, but very honestly no current plans.

We are very focused on getting the diesel production set up and these are highly complex products and a different supply chain that we are having to set up versus what we have in Iowa.

Okay.

That's helpful.

I was just wondering if it was physically possible.

And then you mentioned business intelligence culture as being something you wanted to establish.

Does this go back to some of the ERP changes that are being made in being able to harness the data that you already have in a more efficient manner, or is there something else -- does that mean something else?

Well, it's related certainly.

When we put an operating system in such as the Microsoft Dynamics AX platform that we are working on today, no doubt that will be the engine that will be able to collect the information that's being generated by our business.

When I talk about business intelligence, what I mean is ultimately applications that give our decision-makers and our needle-movers in the enterprise the information they need to make the right decision more efficiently and to drive the business going forward.

And as I come into this Company, and it's been almost a year now, we continue to not have some of the dashboard reporting, some of the exception reporting.

We don't operate the business with a CRM system today.

There are cost-efficient ways to present business intelligence to decision-makers so that they can use those to make better decisions.

In some ways at Winnebago, we continue to run the business with a cockpit instrument panel that doesn't have all the readings yet on it.

So we will do that carefully.

I don't want it to sound like we are going to put eight figures of IT cost into new applications for business intelligence, but with the quality of the CIO that's been added to our team, I think that there will be some cost-effective ways that we can get the information out of the business and present it to our decision-makers more accurately and more quickly.

So I hate to be so 30,000-foot level on that answer, but we need better intelligence to be a more competitive manufacturer in the future.

Okay.

Fair enough.

Just the last thing, Mike.

I think you mentioned in your prepared remarks that you've seen a little bit of an uptick in the Class A market, the diesel specifically, towards the end of the quarter and I think you said the backlogs or early read on 2Q is positive.

I was just wondering if you could talk about if you've seen anything else from a cadence standpoint in the motorhome business towards the -- in the month of November or maybe if you could talk about what retail trends looked like over the last 3.5 weeks?

Obviously, I can't and won't give you specific Q2 retail information other than I will say this that the retail momentum that we described in this call on the motorized side is continuing.

That's all I will say.

We have introduced at least three new floor plans within our Vista series here over the last three or four months and our dealers are receptive to the increased value that they are seeing on that particular Class A gas series.

In fact, we have three active lines of Class A gas products and year-to-date fiscally two of them are positive from a retail standpoint.

Now, we won't begin to get overly confident because that business has dropped precipitously for us and whether we have found the bottom or not and we are starting to rise from that, as I said, is yet to be seen.

But it's good to see that we think we are getting some early feedback in the retail environment, but also with orders on some of this improved Class A product.

As you know, we are focused on the health of our full line and we think our Class B and our Class C products are pretty well competitively positioned, but we will continue to try to improve our Class A gas position because we certainly know that our friends at the two other large manufacturers in this industry have done very well there.

All right.

Thanks, everybody and enjoy the holidays.

David Whiston, Morningstar.

Good morning.

Had a question actually for each of you.

First for Mike.

You highlighted the new senior leaders joining the Company recently.

How much more transformations up at the senior management level should we expect?

Are you done adding people or is there a lot more to do there?

Well, that's a fair question given that we brought in a number of new people.

I guess the way that I will answer that is we will continue to put together the team that we think is needed to take the business to where we desire, not where it is at today.

And one of the things that we need to spend more time on in this Company from a talent development standpoint are some of the other levels of leadership within the Company.

We've been very focused on getting the right senior leaders into the business to complement the industry talent and experience we have, but we are also going to be looking at some different layers of the organization as well to make sure that we have the right talent in the right places there.

So I can't answer your comment specifically other than I think that's an ongoing journey and we reserve the right to have the talent we think is needed to compete.

And I'm excited about the blend that we have going on here.

I mentioned the team from Grand Design and Don Clark and his two co-founders, the Fenechs and his CFO, Cam Boyer.

These are all very talented, smart, successful RV professionals and it's great to have them on our team now, on our side and not only will they continue to use their horsepower to drive the Grand Design business forward, but we are starting to have really good conversations in educating them about the rest of the Winnebago Industries business so that selectively and mutually we can find ways for them to help us as well.

It will be a blend and a journey over time.

Okay, thanks.

And Sarah, in motorized, the press release highlighted some higher compensation costs.

Was just wondering if you could fill in the story there as to what's driving that?

Well, the key things that we highlighted from a press release standpoint on the motorized side were really focused from a workers' compensation perspective that were higher on a year-over-year basis, as well as some of the ramp-up costs associated with the Oregon production facility.

So those are really the two key points.

From a G&A standpoint, there is certainly some evolution of the G&A spend to the topic you and Mike were just discussing on from a senior leadership standpoint.

And, as Mike also highlighted, we are all very cognizant of having to fund and provide benefits for all of the talent that they are really focused on, be it operationally or from an IT standpoint or in all areas of the business from finance, etc.

So the key elements we really highlighted really related to workers' comp and the ramp-up.

Okay.

Finally, my last question is actually for Ashis.

In your last role at Honeywell, you worked in the Internet of Things area.

I was just curious if you have ambitions to bring a lot of IoT into the Winnebago product lineup?

Thanks so much.

Yes, this is definitely an interesting area where we are looking at it and in our motorized business, we continue to work with our key chassis partners -- Ford, Mercedes, Freightliner and others and in the subsystems area of the RVs, we are also working with our partners, but we want to be really thoughtful and look at applications and use cases, which add significant customer value versus just technology for technology's sake.

So definitely stay tuned for more on this in the months and years to come.

It's an area we are looking at closely.

Okay.

Thank you, everyone.

Matthew Paige, Gabelli & Co.

Good morning.

Thanks for squeezing me in.

So you have previously mentioned some strategic options that you were looking at to potentially pursue.

In light of that, could you speak to your thoughts on capital allocation, as well as your leverage levels and what levels you are comfortable with?

Certainly our balance sheet has changed significantly in this quarter.

For most of the Company's history, the debt level has been very low, if nonexistent and as you obviously saw this year, we made a very conscious decision to change the balance sheet in order to fund the acquisition of what we think was a -- hopefully will be a great acquisition.

So certainly going forward, capital allocation will be not only used to fund the existing business and to make sure that we are creating the products that we need to in order to compete more effectively.

But, as Sarah has mentioned, we would like to make sure that we continue to delever in the business and we are discussing with our newly-formed finance committee on the Board what the options for capital allocation are.

We spent a lot of money on a recent acquisition and have a leverage ratio a little bit over 2 right now that we want to bring down certainly in the next couple years to something that starts with a one and then probably following that something with a zero.

Now we are bringing a new sense of new business development ambition to the Company.

Ashis Bhattacharya, who is on the call with us this morning, certainly hired in part to help us be more active in that arena.

We've expressed a desire to maybe even explore some areas outside of the RV arena, but all of them have to be -- any opportunities that we look at have to be right and we are still defining right and putting some of the lenses together there.

So I think you'll see us focus here especially in fiscal 2017 on execution and integration and starting to pay down the debt that we have incurred and then as we have some time here to do some business development work internally, we will hope to put ourselves in a better position in the future to potentially be active again in adding to the portfolio.

But again it has to be the right opportunity however we define that.

Great.

And then the other question I had was just looking at the RV market as a whole.

We are either near or at prior peak levels.

So I guess could you speak to what makes you think we can continue to grow the industry, especially in light of rising oil prices and potential interest rate?

Yes, that's a great question and it's asked obviously often to a lot of the industry leaders and there's a slight uptick certainly with maybe where rates are headed and fuel prices have been low for a while.

I would tell you that we feel confident that the net collection of tailwind elements continue to be material enough that we remain optimistic.

Consumer confidence is steady, if not strong right now.

You have an equity market that has seen a significant uptick, even since the election here last month.

Even where fuel prices are today and where interest rates are today, it's very affordable for people to use and to gain access to the RV lifestyle.

Financing companies are continuing to be careful, but you can get into RVs today through financing mechanisms and I think the industry has done a good job in two areas.

One, increasing the value proposition of many of the products.

You can find affordable entry points productwise to the RV lifestyle, not only in motorized, but also in towables.

And secondly, with some of the demographics starting to turn here in the US, and there is still very much runway left on the baby boomer RV purchase arena.

Baby boomers will continue to buy RVs for we believe sometime in the future, but I think the industry is doing a very good job marketing to some of the younger generation of current or prospective RV customers and really appealing to different use cases, people that are even more active from an outdoor exploration standpoint; folks that are using RVs for more weekend trips; folks that are using RVs for tailgating, for travel youth tournaments.

There's any number of increasing use cases.

So we, like I'm sure Thor and Forest River and others, remain optimistic that there are cautiously several more years of RV upside here, unless, of course, some of the geopolitical or macroeconomic factors are wildly different.

Great.

I appreciate the time and happy holidays.

Steve O'Hara, Sidoti.

Good morning.

Thanks for fitting me in here.

Just quickly on Grand Design, I'm not sure if you mentioned this, but in terms of their growth rate and what would correspond to your fiscal first quarter, can you talk about what their organic growth rate was?

Well, we closed -- it was a little under three weeks remaining in the quarter on that acquisition and so from a revenue standpoint, as we've highlighted, it was $25.8 million of incremental revenues.

Obviously, the transaction costs and the amortization, etc.

are noted from income statement perspective so you can see that from flowthrough, but it was certainly a significant driver for the growth of our total segment, but as we've also commented, we had strong revenue growth on our towable Winnebago-branded product.

That was well over 40%.

So a small piece of the operational activity in the quarter, but impactful and we are excited about the impact it will have for the remainder of the year.

I will add on to Sarah's comments and just let you know that the Grand Design business, like our Winnebago towables business, is seeing double-digit revenue growth.

I know that's a base statement, but they are currently seeing that type of growth in their business.

Okay.

And then just a follow-up.

I think part of the initial talk about Grand Design was that higher margins would boost the overall margin profile of Winnebago.

I assume that is still the case and I guess net of any impact that you guys are making internally with corporate development, etc., would that be still the case where you expect the combination of the two to have a higher margin profile going forward?

Well, the expectations for both segments and the business units within the Company are that everybody will be increasing their gross profitability in the future.

And so, yes, from a mathematical standpoint here, we anticipate that Grand Design will have an accretive impact to our gross margin in the future, but as we've talked about even here earlier today, we expect that from Winnebago-branded towables and motorized.

Sarah mentioned on the motorized side a couple of the elements that gave pressure on the Winnebago gross margin side.

We are working on both of those, especially the workers' comp and we are not pleased that the margins in the motorized side were what they were in this quarter and we will be working with that team to again realize stronger performance there in the future.

So stay tuned as those results happen or don't happen, but, yes, that's a big focus here at Winnebago is increasing gross profitability.

Okay.

Thank you very much.

Thank you.

Ladies and gentlemen, this does conclude our question-and-answer session.

I would now like to turn the call back over to Ashis Bhattacharya for any closing remarks.

Thank you very much.

Thanks, again, to everyone for joining us today as we reviewed our first-quarter fiscal 2017 results.

We look forward to speaking with all of you again as we review our second-quarter fiscal 2017 results on Wednesday, March 22, 2017.

Thank you very much and happy holidays to everyone.

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

This concludes today's program.

You may all disconnect.

Everyone have a great day.