Winnebago Industries Inc (WGO) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Winnebago Q2 2017 earnings conference call.

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

Later, we will conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions).

As a reminder, today's conference is being recorded.

I would now like to introduce your host for today's conference call, Mr. Ashis Bhattacharya.

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 second quarter, which ended February 25, 2017.

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 second-quarter earnings results was issued and 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.

The Company cautions you that forward-looking statements involve a number of risks and 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 over the call to our President and CEO, Michael Happe.

Mike?

Thank you Ashis, and good morning, everyone.

I hope the start of spring is treating all of you well.

These continue to be very dynamic and exciting times for Winnebago Industries.

We are pleased to share with you all today our fiscal year 2017 second-quarter results along with some further insight into the strategic initiatives that are imperative to Winnebago Industries being more successful in the future.

I will start with an overview of key drivers for Winnebago's fiscal 2017 second quarter, and then Sarah Nielsen will dive deeper into the details of our financial results.

In our second quarter, we continued to make strong progress in transforming Winnebago Industries into a material larger company with a more balanced RV product portfolio and an enterprise with significant runway for profitable growth in the future.

It was a short 12 months ago when I had the privilege of addressing you all for the first time during an earnings call as the new leader of a then largely legacy motorhome company trying to find its future identity.

We have made much progress in the last year, admit that there is much work to do, and we'll continue to set our goals high for what this Winnebago team can accomplish in the years to come.

The second quarter marked the first full financial period with Grand Design RV as part of the Winnebago Industries family.

We couldn't be more excited about the strategic, financial, and cultural impact this acquisition will bring to Winnebago.

The Grand Design RV team has continued their impressive momentum in the market and, along with the strong performance of the existing Winnebago branded Towables business unit, our overall Towables segment in Quarter 2 accounted for 46% of our roughly $370 million in total consolidated revenue.

This $370 million in enterprise sales was a 64% overall increase over the same period a year ago when 90-plus% of Winnebago Industries revenue came from our Motorized business.

This portfolio transformation better positions our Company to drive growth and higher market share, appealing to a much wider spectrum of the North American RV industry.

Traction associated with the acquisition of Grand Design and the development of our Winnebago Towables business is not only resulting in an immediately more balanced portfolio, but it also drove significant improvement in profitability.

Winnebago Industries delivered consolidated gross profit of more than $49 million for the quarter, resulting in the expansion of our gross profit margins by 210 basis points year-over-year to 13.3%, the highest level we have achieved in nearly a decade.

We were transparent last fall of 2016 when we announced the Grand Design deal.

That improved profitability was a key strategic driver of that transaction.

It is encouraging to see that forward progress beginning.

Specific to the Towables segment, we continued to deliver significant wholesale and retail growth as consumer demand for Winnebago and Grand Design branded products far exceeded the overall pace of the Towables sector industry-wide.

Lightweight travel trailers specifically have been very strong for Winnebago Industries' dual-Towable businesses.

On the Winnebago branded side, the Minnie line of products, Micro Minnie, Minnie and Minnie Plus, continue to take share due to fresher interior styling, an increasing list of features and our ever popular exterior colors.

Grand Design's Imagine travel trailer line is also continuing its meteoric rise in market share as dealers and end customers alike embrace its strong overall value.

And with the opening of a new dedicated Imagine production facility recently in Indiana, we have been able to materially increase production output and thus shipment availability and retail impact in the market.

Looking ahead, we enter our third quarter with a very strong backlog in our overall Towables segment driven by a healthy consumer appetite for new product and increasing dealer support and confidence in both of our brands.

Our dealers are excited about increasing terms and improving profitability on our overall Towables segment.

As you can imagine, we are also continuing to look at our Towables production capacity to keep up with our projected demand in the years ahead.

We approximate our current Towables share to be around 5%, up from approximately 1% a year ago, and we'll look to target a double-digit share position in Towables from a midrange time perspective.

Turning now to the Motorized segment, revenue for this business was down 3% year-over-year, in part reflecting the now completed impact of our decision to exit the aluminum extrusion business in 2016, but primarily due to changing product mix resulting in a lower overall average selling price.

To be clear, we have increased our total unit deliveries to the RV market on Motorized, but are fully aware that this positive progress is not as strong as the overall Motorized market growth in recent months.

Our Motorized team has spent much time reflecting on the internal and external pressures resulting in this market share dilution, and we are investing material efforts in reversing this trend in the future.

Last fall, Winnebago began to introduce several new Class A floorplans under the Vista line, and we have seen promising results to date.

At the end of Quarter 2, our Vista retail performance was up double-digit percentage year-to-date, still overshadowed by some of the softness within other Class A products.

We are also seeing promising results from our value diesel series, the Forza product.

We are hard at work evolving our overall Class A product line.

Dealers and end customers will learn more about these plans as the calendar year unfolds.

Unit deliveries to dealers and overall retail on both Class C and Class D product lines are up year-to-date, in part also helping to accelerate the shift in average selling price overall on Motorized.

We are pleased with the initial success of our recently introduced Era and Paseo Class B lines and the increasing momentum of our Mini Winnie Class C product.

Profit in the Motorized business was materially impacted by several factors, including the shift in mix and lower ASPs but also by the continuing costs related to our West Coast manufacturing expansion project.

The Junction City plant, which is producing new diesel units as we speak, is part of a four-pronged approach to provide ample Motorized manfacturing capacity for the future.

In addition to Junction City, we will also be adding an additional line in our Lake Mills Class B facility, re-flowing our chassis weld and assembly lines in the Forest City Motorized facilities for better throughput, and, lastly, driving materially higher levels of employee productivity across all of our North Iowa Motorized operations.

While we cannot guarantee our market share dilution on Motorized will stop quickly in the next quarter or two, we do strongly believe that we are working intently on the right projects needed to drive higher levels of demand and more efficient supply.

I want to state clearly, though, that there are several elements of our Motorized product line and value chain that are healthy.

We strongly believe we make some of the safest and highest quality coaches available, and our customer service support to our dealers and end users is industry-leading.

However, over time in this Motorized segment, there has been too much operational complexity, not enough attention paid to end customer needs, slower responsiveness to competitive moves, all of which over many years eventually caught up to our core flagship motorhome business and slowed our momentum.

Those deficiencies are being addressed.

Simply, we will refocus externally on increasing our intimate understanding of the end customer, reorganize our motorhome division with the right talent and the right price for stronger product line focus and nimbleness, and drive higher levels of manufacturing efficiency.

Even as we drive future net positive growth in profitability for this enterprise from our Towables segment line momentum where we are currently taking share daily in the largest segment of the RV industry, we must reposition the motorhome business to be more flexible, resulting in sustainable, longer-term success.

With that overview, I will now turn the call over to Sarah Nielsen, who will review our second-quarter financials in more detail.

Thanks, Mike, and good morning, everyone.

Second-quarter consolidated revenues were $370.5 million, an increase of 64% year-over-year, driven primarily by the inclusion of our first full quarter of Grand Design results as well as organic growth in the Towables segment.

Second-quarter gross profit was $49.3 million.

or 13.3%.

compared to $25.3 million.

or 11.2%, up 95% over the prior year due to revenue growth and margin expansion of 210 basis points.

Second-quarter operating income was $28.4 million, up over 110%, and net income was $15.3 million, or $0.48 per diluted share, an increase of 63% year-over-year.

Note that selling expenses and G&A combined increased as a percentage of revenues by 10 basis points in the second quarter due to the impact of Grand Design.

For the first six months of fiscal 2017, consolidated revenues were $615.8 million, an increase of 40% over the prior-year period.

Operating income for the first six months was $46.8 million, up 78%, and net income was $27 million, or $0.91 per diluted share, an increase of 51% over the prior-year period.

As illustrated in our consolidated statements of income, there are a number of significant items impacting our second quarter of fiscal 2017.

I would like to cover these items in more detail and provide context as to how these items will impact our financials going forward.

The first significant item relates to the post-retirement healthcare benefit income.

As we discussed last quarter, the decision to terminate our post-retirement healthcare plan effective January 1, 2017 positively impacted our second quarter by $12 million, or $0.25 per diluted share, net of tax, compared to prior year post-retirement healthcare benefit net income of $1.6 million, or $0.04 per diluted share, net of tax.

All of the benefits of this plan termination have now been recorded in the financial statements and there will be no further impact going forward.

Notable Grand Design acquisition related expenses were as follows.

First, we incurred additional transaction expenses of $500,000 for the quarter, or $0.01 per diluted share net, of tax.

We recorded a full quarter of amortization expense related to the definite lived intangible assets acquired.

This expense amounted to $10.4 million, or $0.22 per diluted share, net of tax.

In addition, we recorded a full quarter of interest expense related to the debt established to fund the acquisition.

The interest expense for the quarter was $5.2 million, or $0.11 per diluted share, net of tax.

Note that, during the quarter, as required by our credit facility, we entered into an interest rate swap contract which effectively fixed our interest rate on $200 million of our term loan at 6.32%.

We have provided non-GAAP EBITDA and adjusted EBITDA performance measures in our press release as a comparable measure to clearly illustrate the effect of the two topics I just reviewed.

Excluding the two items I just discussed and depreciation expense, consolidated adjusted EBITDA for the quarter was $29.1 million, an increase of 118.5% year-over-year from $13.3 million, resulting in a 195 basis point improvement in adjusted EBITDA margin to approximately 7.8% for the quarter.

The overall effective income tax rate for the second quarter of fiscal 2017 was 34.1% compared to 30.6% for the same period in fiscal 2016.

The increase in the rate is a result of two key items.

First, the rate was lower last year due to the retroactive reinstatement of the R&D tax credit as well as other credits that were enacted in December of 2015.

Also, the increase in the effective rate this year is due to higher pretax income associated with the acquisition of Grand Design resulting in lower permanent deductions as a percentage of pretax income.

Turning to the individual segments, Motorized revenues were $198.9 million for the quarter, down 3% year-over-year.

As Mike noted, although total Motorized deliveries were up 3.6% year-over-year, the average selling price decreased 5.2% as the mix continued to shift towards Class B and Class C products.

For the first six months of fiscal 2017, Motorized revenues fell 2.1% year-over-year, reflecting the impact of the Company's exit from the aluminum extrusion business to outside customers, which had contributed $6.1 million in revenue in the first six months of fiscal 2016.

Segment adjusted EBITDA, which excludes the positive impact from the termination of the Company's post-retirement healthcare plan, as well as depreciation expense was $9.1 million, down 22.3% for the quarter.

Adjusted EBITDA margins decreased by 110 basis points, primarily driven by the shift in product mix, increased pricing pressures, and acceleration of our West Coast operations.

For the first six months of fiscal 2017, segment's adjusted EBITDA was down 18.4% year-over-year.

On the Towables side, revenues were $171.6 million for the quarter, up $151 million from the prior year, driven by the addition of $146.3 million in revenues in the Grand Design acquisition as well as continued strong organic growth from Winnebago branded Towable products.

For the first six months of fiscal 2017, Towable revenues were $221.8 million for the quarter, up $184.3 million from the prior year with $169.4 million in revenue from the Grand Design acquisition and nearly 40% growth in Winnebago branded Towable products.

Towable ASP in the quarter rose 49.7%, primarily due to a greater proportion of sales coming from the Grand Design higher-priced (inaudible) units.

Segment's adjusted EBITDA for the quarter was $20 million, up $18.4 million from the prior year, and adjusted EBITDA margins increased by 400 basis points, primarily due to the inclusion of Grand Design's products within the segment.

For the first six months of fiscal 2017, segment adjusted EBITDA was $24.6 million, up $22 million over the prior year, and adjusted EBITDA margins increased by 410 basis points.

Turning to our balance sheet, in the first quarter, following the Grand Design transaction, we paid down debt by $13 million.

As of the quarter end, the Company had total outstanding debt of $329.5 million.

Working capital was $142.1 million.

The debt to equity ratio was 81.8% compared to 86.1% last quarter, and the current ratio was 1.9.

From a cash flow perspective, cash from operations improved by $14 million compared to the same period last year.

Before I conclude, I would like to recap a few key items.

In future quarters, we will no longer see an impact from the termination of our post-retirement healthcare plan.

In addition, we no longer will have the amendment amortization benefit that we had in Q3 and Q4 of 2016.

Our amortization expense for the remainder of fiscal 2017 is expected to be approximately $12.3 million, $10.3 million in Q3, and $2.1 million in Q4.

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

Our expectation for interest expense for the remainder of the fiscal year, which includes amortization of debt issuance costs, is $10.5 million, of course dependent on interest rates and how quickly we pay down debt during the remainder of the year.

Lastly, we expect that our effective tax rate for the remainder of the year will be around 34%.

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 session, I would like to take a moment this morning to review several different initiatives.

First, the careful integration of the Grand Design RV business continues to see excellent progress.

We have been very focused on three aspects of this integration.

First, establishing critical relationships between our Winnebago and Grand Design team members so that we can begin to share key information as appropriate between our teams.

Second, the push to identify and realize appropriate synergies that take advantage of our larger scale and common opportunities is progressing nicely.

We had a modest first-year annualized synergy target that we expect to exceed.

Third, we are working diligently to ensure the Grand Design team maintains its momentum in exceeding the expectations of their dealers and end customers.

Our second-quarter results would validate that we believe this is happening.

Now, in regards to the changing geographic footprint of our Company, less than a decade ago, almost 100% of Winnebago's assets were located in the great state of Iowa.

With the acquisition of SunnyBrook RV in 2010, the opening of the Junction City, Oregon manufacturing and service facility, and the acquisition of Grand Design, we now have more than 1,000 employees in several facilities in other states, notably Indiana and Oregon.

In early January of 2017, we announced to all of our employees that we had signed a lease agreement for a new executive office space in the Twin Cities.

On February 3, we moved approximately 20 individuals into this office.

The Eden Prairie office will house the majority of our executive leadership team and select talent from the corporate shared service functions, which we carefully choose to have centralized.

The high majority of our salaried motorhome personnel will remain in North Iowa as we determine future steps in treating a more responsive and flexible business.

We are very confident this new Minnesota office will allow us to effectively compete for the leadership talent we need in the future.

In addition, the Twin Cities is a strong, more accessible market to be able to directly engage key stakeholders in the business -- strategic service providers, suppliers, our board, dealers, investors and other constituents.

And for those without a map in front of them, our Minnesota office is a short two-hour drive north of Forest City.

Now, the second quarter was the first full quarter for our new Chief Information Officer, Jeff Kubacki.

Amongst Jeff's early tasks is to co-lead the stabilization and completion of the ERP implementation project.

Jeff is a strong IT executive and has significant ERP experience.

With his leadership, we have reset the project's direction, made several internal project governance changes, and upgraded implementation partners.

We are reviewing all of our business processes again to ensure that all of our ERP-related work is aligned with our future state and that we optimize the functionality of the overall system.

We are committed to a high-quality finish of the ERP system by the end of the fiscal 2018 year.

Along with the arrival of Jeff to our executive leadership team has been the addition of Don Clark, the President of the Grand Design business.

Don brings a tremendous amount of successful RV operating experience and leadership maturity to our evolving leadership team, and has been very open with the team about his desire to not only lead the Grand Design business to unchartered heights, but his willingness as an executive officer to help the whole of the Winnebago enterprise.

We remain committed to building very best senior leadership team possible.

In addition to our senior leadership, we are adding more horsepower to the Winnebago Industries' Board of Directors.

In the last 90 days, we have announced the addition of two highly experienced, active business leaders to the board.

Rick Moss, Chief Financial Officer with the successful apparel manufacturer Hanes Brands, and John Murabito, the Chief Human Resource officer with health services leader CIGNA, will both be tremendous additions to our board and bring valued experience from their own successful public company experience.

Lastly, we are spending more and more time on what we call the key leadership level here at Winnebago.

The Grand Design leadership team is now part of this group, and they add valuable breadth and depth of RV experience to the organization.

We will continue to ensure that we have the right talent here at Winnebago Industries to bring our vision statement and future business objectives to fruition.

We have a stated long-range strategic priority to achieve a high level of operational excellence.

Organically, with the leadership of Chris West, we have set initial focus on three areas -- safety, quality and productivity.

There are numerous projects and initiatives identified and initiated in each of these areas, and we are committed to make significant progress on each.

We believe there are millions of dollars of corporate waste we can eliminate and incremental profit generation opportunities we can achieve by focusing on these areas.

Successful progress will lead to higher levels of employee engagement, end customer satisfaction, stronger manufacturing throughput, and improved profitability and working capital within our existing operations.

As we stated earlier this call, we are also acutely aware of the opportunity we have to drive significantly higher share in the Towables segment, and we are actively working with each of the Towables businesses on their production strategies for the future, which will and are a combination of organic efficiency improvements and likely investment in additional facilities as needed.

And lastly, this morning, we have talked in the past about the need for Winnebago Industries to do a more effective job of staying ahead of the business from a strategic planning standpoint.

When I arrived, we seemed to be chasing business as opposed to innovating and leading.

Earlier this month, here in our Eden Prairie office, we engaged our Board of Directors in the initial stages of a true long-range plan.

What do we truly envision Winnebago Industries to look like years down the road, at a minimum at the end of the fiscal 2020 year?

While you will be hearing more about the specifics of our long-range plan in the future, as we have discussed before, with the creation of our new enterprise vision statement, we now aspire to help our customers explore the outdoor lifestyle, enabling extraordinary experiences as they travel, live, work and play.

We may not ultimately be the biggest RV manufacturer in North America, but we will work towards being the most trusted supplier in the space, and one that is materially larger and more profitable.

And we have acknowledged that, when the timing is right, we will seek to identify strategic and profitable diversification opportunities within the outdoor lifestyle sector.

Those could reside inside or outside the recreational vehicle market.

With the integration of Grand Design being a current high priority, and now in possession of a balance sheet that we are intent on making progress on deleveraging effectively, our urgency around those business development efforts has been slightly lowered in the near term.

As I stated at the beginning of this call, these are very dynamic and exciting times for Winnebago Industries.

I would like to thank all of our Winnebago Industries employees, including our new Grand Design teammates, for their hard work and dedication to make this a stronger company in the future.

Thanks for listening in this morning.

We will turn it back over to the operator for the Q&A session.

(Operator Instructions).

Craig Kennison, Baird.

Good morning.

Thank you for taking my questions.

I wanted to start with Towables.

That backlog is well in excess of your Q2 deliveries.

I just want to get a feel for what your realistic capacity to produce Towables is in one given quarter, and if you can't make all those units, do you see any risk of cancellation?

Good morning.

This is Mike.

Thank you for the question.

As you articulated, it is a sizable backlog in the Towables business, which we are very excited about.

It is a culmination of the efforts of both of our Towables business, both Winnebago but also Grand Design.

The way that we define the backlog is we put a six-month horizon on those orders.

So those are orders that we have visibility to from our dealer base for those products within a six-month horizon.

So they do extend past the next quarter into the second quarter.

We track very carefully not only the retail momentum and inventory position at our dealers, but the length of expected fill rate time on those orders.

And that fill rate time is definitely creeping up as our business is growing and as our existing capacity is being utilized.

As I mentioned earlier in the call, and I think this was even initiated in the midst of our Q1, specifically within the Grand Design business, we have recently opened a new manufacturing facility there focused primarily on the Imagine travel trailer line.

We believe that we have more runway in that plant for the Grand Design business to continue producing or increasing their output.

But what that also allowed us to do was to move the Imagine travel trailer line from an existing facility on the Grand Design campus, thereby opening up more capacity in the building that that line vacated.

We are very actively in conversations with the leaders of these two businesses about how their growth projections match up with our capacity, and we will be continuing to make the appropriate investments so that we don't suffocate the demand that we are creating in the market.

We feel very optimistic that we can continue to have well above market industry momentum in retail and shipments on these two businesses for the next two quarters, but we are also going to be very honest with you that those wait times for products are extending a little bit, and that increases the urgency on our side to do what we need to do to bring those down in the future with whatever capacity we can create.

Thanks.

And then Mike, in your prepared remarks, I believe you mentioned improving dealer inventory turns in the Towable marketplace.

Is there any way to frame that for us?

Given the impact of Grand Design, it's hard for us to calculate that metric.

But what can you share with us regarding your dealer inventory turns at the Towable level on a year-over-year basis?

The good news is the product at retail is turning very well.

And we have two different Towables businesses at really different stages of their growth momentum right now.

The Grand Design business is creating turns at their dealer base that we believe, in most cases, are best-in-class on those dealer lots for the Towables segment.

And so we are probably less focused on the Grand Design dealer turns because we think those are going very well right now.

And so long as we continue to keep the retail momentum going there, we think where that particular business is, those turns are in good shape.

The comment I made there about improving turns is probably a little bit more specific to the Winnebago Towables business.

That business is growing rapidly as well, albeit off of a lower base.

And while we have spent a lot of time reinvesting and strengthening our product line and adding dealers, the impact of the pipeline fill on new products and adding dealers has put inventory into the dealer base that has kept the dealer turns from being where we would like to see them in the future.

Now, they are headed in the right direction and our dealers are very much responding that they like what they are seeing on the Winnebago Towables line, especially the travel trailers that they are receiving.

And retail for the year is outpacing our shipments in terms of percentage growth year-over-year.

So those turns are growing.

We would love to get the Winnebago Towables business turns to the same level as Grand Design, and we want to do everything in the Grand Design business to keep those turns where they are at, if not continue to slightly improve them as possible.

So we think it's mostly good news but we are very focused, as you can imagine, on just making sure that the inventory is moving quickly in these two businesses.

Thanks.

And last one for me, you mentioned a 2020 plan.

Do you envision a time when you would include financial targets in that goal, something that you would express to investors, or is it going to be less specific than that?

That will probably play out, but I'll stick my neck out a little bit and tell you that I would like to be in a position probably later this fall to be able to share with you some general targets for where we would like to see the overall Winnebago Industries' business be in three years.

As I stated in the call, we are just beginning those conversations with our Board.

With Sarah's lead, we have created several financial models around what the future state could be, and obviously there are inherent market assumptions and strategy assumptions that are at the base of those financials.

But we need to get ahead of our business strategically and financially.

I want to put some stretch goals in front of our team internally.

I want our employees to be both incentivized but also accountable for creating more value for our shareholders and reaching some higher levels of success, both in the market but also financially.

So, of course, we would tell our employees first as to what those 2020 goals would be, and hopefully put some incentives around those goals for our employees.

But generally, once we are comfortable with those, it is probably likely that we will share those.

But as you might imagine, we want to be very intentional, very careful that we have the right goals in mind.

But Craig, I can imagine us sharing some more specifics with you on that probably sometime later this fall, I'm guessing in probably the September or October call.

So stay tuned.

Great.

Thank you.

Tristan Thomas, BMO Capital Markets.

Good morning.

Can you hear me?

Two quick questions.

One, Mike, you mentioned the Junction City was producing new units.

Can you maybe give us some context of where that stands in relation to a full production ramp?

We are still very early.

We've been producing diesel units here gradually for the last couple of months.

We have moved one of our 45 foot diesel lines from Iowa out to Oregon, and all of the corresponding supply-chain processes that go with that.

So, we are ramping up significantly.

I just sat down with our team here within the last couple of weeks and reviewed again a series of sort of step-ups in the production plan in Junction city here over the rest of our fiscal and calendar year.

So as you might imagine, this is a combination of both demand plus also operational capabilities.

So, I would say, in terms of where we hope to be, we are still early.

But as the team is gaining increased competency around building those units in Oregon, we are almost weekly and certainly monthly increasing the rate of production significantly.

In addition, we are starting, in the near future here, to add other lines of diesels to the production mix.

So, we started with one line.

We will be moving other lines of our diesel category out there.

And so, as you would imagine, those have their own pace.

We go through a pilot and then a first production run, and then we start to find our rhythm.

But the good news is things are moving and we want to complement that obviously with the demand that justifies getting that facility up to the rates that we know it can produce someday.

Okay.

And then a second question, Class C deliveries basically flat in the quarter.

I was just wondering if you could maybe give us some context around that.

Then also was there any impact from the rental agreement with Apollo either in this quarter or the prior year's quarter?

Really I'll answer the second one first.

But we'll see the majority of the Apollo impact to the Winnebago business here coming up in Q3.

All of the Apollo rental will take place in Q3.

Right.

So you'll see that in this particular quarter.

In fact, we have some folks visiting them currently as we speak.

That relationship we feel is in good shape, and we work very hard to earn their business on a very consistent basis.

Back to class Cs, and certainly Apollo has a significant role in our class C business, as I mentioned in the call, we have momentum around a couple different parts of the class C lines, specifically what we call Mini Winnie and the Fuse.

Those products are doing very well.

However, we are seeing some softness in some other parts of the line.

And I will tell you, I think what -- and I'm sure our competitors and some of the other companies would probably validate this, but what you saw in Class A a couple of years ago is likely happening a bit in class C where the product value proposition is increasing quickly and significantly, and we are spending a lot of time here at Winnebago talking about our future plans in Class C to make sure that we are on the forward side of that curve in creating stronger value in this category.

So, while I can't share specific details, there are some projects on the whiteboard that we will be working on here that hopefully, in addition to the Mini Winnie and Fuse, will add a little bit more momentum into that category of products for us.

We still are seeing positive retail.

Our dealers are taking product.

We are not quite at the pace that the rest of the industry is, and we need to shore that up.

Great.

Thank you.

Mike Swartz, SunTrust.

This is Anna on for Mike.

So, first of all, can you provide more color around your commentary on pricing pressure in the motorhome business?

Yes, I'll speak to that.

Specifically, that's probably been more prevalent on the Class A side, and in part that's been because our lineup has not been as strong as it should have been, and so we have been working with our dealers as needed to both make sure that they are comfortable with the pricing that they receive, but also that, when they are in the business of retailing a unit, that they are getting the appropriate support that they need from us.

So, I would say the class A gas category is probably bearing the brunt of some of the pricing pressure.

We are seeing a bit of that in Class C as well, Class B not quite as much.

And diesels have been pretty steady.

We announced here just weeks ago a new diesel warrantee promotion until I believe the end of August for that line of products to make sure that people understand that, when they buy a Winnebago diesel, they are getting something from a manufacturer that's willing to step or back up that significant investment.

So it's primarily Class A related.

And I will tell you that price pressure for us probably will continue until we get the product line back to where we need it in that category.

And that will happen.

As I said in the call, our dealers and end customers will see some things from us later in this fiscal and calendar year that we hope will position us much more effectively in that class of products.

Got it.

Thanks for that.

And then next, how should we think about the synergy opportunities from Grand Design on both a cost and revenue standpoint?

You talked about how you're getting more cost synergies in year one than you thought, but does that mean that the total opportunity is larger than the $7 million that has previously been talked about?

Well, I would hope that the opportunity is larger than the $7 million that we've referenced.

We are off to a good start there.

As I mentioned, we already have line of sight to the first year annualized synergy savings that are larger than the somewhat modest goal that we had set.

So hopefully, if we can get off to a good start there, that momentum can continue.

We are working very carefully with the great work of our sourcing team at Grand Design, but also the Winnebago sourcing team.

And together, we are having what I think are very respectful and strategic discussions with our suppliers about how we can take advantage of our increased scale and some of the standardization of some of the common commodities or parts that we both use.

And so I would expect that we will hopefully see a little bit of tailwind in the future.

Now, I'm not going to sit here today and say the $7 million is going to turn into something that's triple that, but we are off to a good start.

That will certainly be an element of slight accretive momentum for us profitability-wise this year, but it's not large in total.

On the revenue side, I would say there's less synergy on the revenue side in the short-term, primarily because we are really running these two Towables businesses as separate businesses today facing the market -- two brands, two different product lines.

There's no cloning of products between the brands.

We will not do that.

And each of those businesses has their own dealer networks and they are very focused on those dealer networks and taking care of those dealers and marketing and servicing the end customers effectively.

So, while we feel better about some of the combined positions we have with some of the common dealers where we are more important and, as an enterprise, we have broader dealer reach than we ever had before, I would say there's less synergy on the revenue side in the short-term.

We are just tremendously thrilled with the momentum that each of those businesses have.

As I stated before, we are taking share from the market, and we have significant ambitions to at least double our Towables share sometime in the future, and our teams are very, very focused to that end.

Got it.

That makes sense.

And then lastly, could you just talk about how we should be thinking about the motorhome backlog?

It was down 23% in the quarter.

Yes, the motorhome backlog continues to run negative.

It is a little more negative this quarter than it was the last time we spoke at the end of Quarter 1. This has been a learning curve for me since joining the Company.

I will not run from the fact that we absolutely wish our motorhome backlog was higher.

It is in a position that we look at every day and make sure that we are aware of its future forward-looking implications.

That being said, for the most part, we have been able to continue to produce positive unit retail and positive unit shipments in each of our quarters here recently in spite of the backlog.

Now, I think, in some part, that's a combination of our business being a little closer to retail.

We're getting a little bit more effective from a manufacturing standpoint on filling retail orders more effectively.

Certainly, when you have some business with the rental companies, the timing of that affects your backlog as well.

The backlog looks different in the middle of a quarter sometimes than it does at the end.

But we want that backlog in Motorized to be significantly higher.

It would be one sign, but not the only sign, of getting some momentum back in the market, which is taking share as opposed to giving share.

And we have some I won't say aggressive goals for Q3 and Q4 in Motorized, but we know what we want to achieve in those next couple of quarters.

And our sales team is very focused on what we need to do to both retail product but also make sure that we replace that retail product on dealers' lots with what we have available.

Got it.

Thank you very much.

Steve [Hall], Northcoast Research.

Good morning everyone.

Thanks for taking my question.

I just wanted to start off (technical difficulty) is really strong in Towables.

Can you break out what the units look like on an organic basis in the Towable business?

Are you talking shipment or retail?

Shipment.

I would tell you again we won't share specific detail by brand, but, on a unit basis, both of these businesses are up significantly higher than the industry.

I will say this.

On retail fiscal year-to-date, both businesses are trending at retail higher than 50% year-to-date.

And while the shipments, unit-wise, are not quite at that level, that goes back to some of my comments earlier about increasing turns on Towables, both businesses are driving multiple double-digit growth, unit-wise, in total shipments.

And again, we are hopeful that that can continue.

As you might imagine, the law of number starts to take effect as each of these businesses get a little bit bigger in the future.

But the good news is that retail is exceeding shipments, thus increasing turns.

But we are very pleased that both brands are driving significant unit shipment growth.

Okay, thank you.

And then just you mentioned something about adding another line at Lake Mills for (technical difficulty).

Could you elaborate a little bit on when that will take effect and maybe quantify what kind of impact that would have on capacity?

And then just bigger picture, there's been a lot of geographic and product diversification since you've arrived.

And one of the things that occurred prior to your arrival was the acquisition of the Junction City plant.

And if you kind of look at the Company today, it's changed a lot.

Towables is growing, and it seems like both of the businesses you have are just performing exceptionally well.

So is there any chance that we might see some West Coast production because, from the industry standpoint, it seems to be an area of a need just in general.

I'll start, Steve, and thanks for your questions on the Class B side.

We will be adding additional capacity within into our Lake Mills facility on Class B. I guess, theoretically, you could say that the maximum capacity in adding a second line would be double.

It won't get there quickly, and that doesn't necessarily mean that we have all the demand to double our Class B business.

The Class B industry segment continues to be a small one, but an increasingly growing and competitive category as more RV manufacturers get in the business.

It is a segment where we have been successful in producing great new products.

We have three lines now, the Era, the Travato, and the Paseo, several new features in each of those lines.

So, as we look forward in the next several years, we think there is significant opportunity to increase our Class B business, and we believe that obviously necessitates adding another line to that facility.

So, we are optimistic that that move will be able to accommodate demand for a little while longer, but we will do whatever it takes if the Class B demand even exceeds what we're putting in there.

Junction City and West Coast production in general, we have several of our competitors who do have towables facilities out on the West Coast, either in California or in the Northwest.

We have experience even within now the Grand Design team from their past lives within the industry of opening and using West Coast facilities.

So we have stated very clearly since I've arrived that, while that was rationalized and strategically positioned as a diesel manufacturing facility, we have a campus out there that could someday definitely be used for other products if we thought it was right to do.

Around 30% of our Towables business is sold west of the Rocky Mountains, which definitely means that there could be an opportunity to explore that in the future.

Especially for the lightweight travel trailers, the lower price point you get, the higher percentage that freight bill is when you ship it from the central part of the US.

The Grand Design team has done a wonderful job building their business without a West Coast facility to date, and we have even more capacity improvement potential on that existing campus.

But we absolutely could look at the West Coast as needed, and we've had that same discussion on the Winnebago Towables side as well.

So, while we are not sitting here today announcing anything, we are not restricting the Junction City campus or even broadly the West Coast from taking towables production to in the future.

When the time and the economics are right, that could very well happen.

Thanks.

David Whiston, Morningstar.

Thanks.

Good morning.

So I have three questions.

First, on your dealer network, can you say what percent of your Motorized dealers carry Grand Design now?

And if it's not 100%, or close to it, where you would want that to be over the next couple of years?

From the standpoint of the crossover, that was a much more similar dealer base between the two companies as we were walking through that last fall as opposed to the Winnebago branded Towables side of the fence.

From a percentage standpoint, I don't have a specific percentage to share in regards to what that mix is, but it was a pretty similar overlay between the two as it relates to what our thoughts are on a prospective basis and what we want that to be.

We don't have a goal specific to that question.

Perhaps we should, but we really don't at this time.

As I've said, we really have three business units here that are driving their own dealer strategies.

And some of us, like myself and others, are very mindful of where we have more than one line of products.

And certainly, we want to become more important to the right dealers for the different business categories.

As an example, a dealer that could be wildly successful with fifth wheelers or toy haulers may not be the best candidate for a diesel dealer in that market.

And I guess the other thing I will say, just in response to that, is we are being very careful at the beginning here of the acquisition, or the integration, excuse me, of Grand Design to not impact their business model facing the customer at this time.

These guys have done a lot of great things over the last four and a half, five years, and we expect that that can continue for many more years.

And we want to make sure that our dealers on the Grand Design side know that we are entrusting and empowering the Grand Design team to continue to grow their business, and we are not going to come into their businesses and in any sense prematurely or disrespectfully leverage them into other lines.

Where that conversation works, and we do have many common dealers, as Sarah said, we are having some good conversations, but we are not going to force that at this time.

Okay, that's helpful.

Moving on to parts, do you guys already do Winnebago branded parts?

And if not, are you interested in doing that, or is that something customers really wouldn't care about?

You generally lump your parts into captive parts and competitive parts, obviously captive parts being those parts that a dealer or end customer could not find from someone else, and then competitive being those that obviously a third-party supplier either makes for you or is made on the aftermarket well fence side.

One of the I guess traditional strengths of the Winnebago Motorized business has been its vertical integration, and thereby we've had probably a higher percentage of captive parts than probably several of our other Motorized competitors.

That is not the story on the Towables side.

We very much work with the Lipperts and the Patricks and the Dometics and Bedfords and other suppliers, and our competitors also work with those suppliers as well.

So, while we work very hard to create a unique combination of features on the Towables side, we are definitely using a in a high majority an outside supplier.

So, you mentioned, though, a very interesting topic, and it's one that we need to spend more time on in the future.

If you look at our vision statement, we ultimately are using the word "solutions" for who we aspire to be in terms of what we want to offer our customer.

And I believe at this company someday there is significant runway to explore additional revenue streams and strengthen revenue streams outside of just the traditional finished goods, whether that's parts or other services, or solutions that we could offer.

So we are spending more and more time on parts.

It is not as high a percentage of our overall revenue as I think it can be in the future, but I can't tell that you will see any significant benefit of those conversations in the short-term quite yet.

Okay.

That's helpful.

And then finally, in your comments earlier, you mentioned that Motorized customers' needs were not being met or prioritized.

Could you just expand on that a little?

I'm sorry, David, can you repeat that again?

You had mentioned in your prepared comments that, in Motorized, that customers' end needs -- end customer needs were not being met or prioritized.

I was just wondering if you could flesh that out a bit.

That's probably -- and I hope you guys recognize we are probably being painfully honest here with you on the things we're talking about on our Motorized business.

We do a good job in several parts of the Motorized business on anticipating customer needs.

One of the poster childs is probably our Class B business there.

But I will tell you, in some other cases, we were not as in touch in years past with where the end customers or our competitors were going.

And when the market zigged, we may have zagged.

And we are putting a significant re-emphasis with our product managers on re-engaging our current and future end customers much more proactively and in a disciplined way so that we can understand what solutions we can bring to the market that they have value in in the future.

If we are going to be one of the most profitable RV companies in this industry, and as I said not the biggest but hopefully the best, we're going to need to be doing some things differently from some of our very competent competitors.

And in my past experience, and in several industries, you can become a market leader by focusing on customer insights and solving their problems faster or more effectively than some of your competitors are doing.

That's the type of culture, David, we are trying to create here.

And I think we got a little bit complacent on that topic in some recent years.

I say that carefully because we are doing a pretty good job in some other areas, but it is definitely a point of emphasis going forward.

Great.

Thank you.

Steve O'Hara, Sidoti & Company.

Good morning.

Just quickly, I thought I heard you talk about the year-over-year growth for the Towable business.

And I guess I was curious.

Did you say the Grand Design was -- the growth was 50% or more in the quarter?

And if not, could you just tell us what the organic growth rate for that was?

Obviously, you didn't own it last year, but if you could talk about what the revenue growth rate was for Grand Design year-over-year, and then also talk about the ERP costs and what they were in the quarter and maybe what the new expectation is going forward.

Thank you.

Certainly.

From the standpoint of the Towables segment, as we noted, we've highlighted the impact from a revenue perspective that Grand Design had in our business, but from -- on an organic Winnebago branded Towables perspective, we shared that our revenues are up approximately 40% year-over-year, so really, really great growth on the existing Winnebago branded business.

If you look at Grand Design in the quarter compared to a similar or comparable time a year ago prior to ownership, you're looking at revenue increase in excess of 50%.

So, that's a little bit more insight to answer that first part of your question.

From the perspective on the ERP side, with the start of Jeff Kubacki, our new CIO, in mid-November, his first order of priority was to focus on evaluating where things were at.

And so that has taken place over this last quarter.

So, a lot of the key efforts were really reevaluating kind of where we sit.

And so from the standpoint of the spend from an ERP perspective, it was much less in this quarter than it has been in some of the past quarters.

So you're going to look at investments in Q2 of 2017 of approximately $1 million, and half that was capitalized and half that was immediately expensed, so not as significant as what you would have seen a year ago at this point.

Okay.

Thank you.

And going forward, are you still talking about kind of the same figure for the total spend, or you just kind of assume whatever you had plus another year of that going forward?

Is that fair?

That's fair.

Okay.

And then just on the Grand Design, so that growth seems pretty significant compared maybe to the growth rate coming into the acquisition.

And how much runway is there in terms of capacity constraints?

I guess is that something that needs to be dealt with kind of ASAP, or is there enough runway there to kind of keep growing at a pretty good clip without being concerned that we start to hit bottlenecks or production constraints?

We are discussing that topic actively, and so it's a conversation that we are having today we had with our Board of Directors here even at our meeting here a week or so ago.

So, yes, we intend to make the investments necessary in the future to optimize the runway that Grand Design has and, very candidly, to optimize the runway that our Winnebago branded Towables business has as well.

Both businesses are at a later stage in sort of the maturity of their current campuses and the land and buildings we have available, so we are doing everything we can to get ahead of that in the future.

So you'll probably hear more news from us in the months to come in addition to future earnings calls, but, as we said, it's a good problem to have, but if you are a dealer or an end customer that has to wait much too long, in their opinion, for product, you do run the risk of, at a minimum, some dissatisfaction, and, in worst case, some canceled orders.

And we are doing everything we can to make sure that that's not the case going forward.

Okay.

And then just one last one, sorry.

Could you shift production from -- let's say maybe put a little bit of a damper on production at the Winnebago Towable and shift that to producing Grand Design, or is that something you couldn't do maybe logistically or anything like that?

It seems like if you're growing revenue stream at 50% or so, at least in the quarter, and it's much bigger than the Winnebago Towable, it would seem to produce a lot more profit going forward.

I'm just wondering.

Could you shift capacity to maybe the more profitable business if you had to, worst-case scenario?

That's almost like probably picking a favorite child a little bit.

But I would tell you that it's a fair question, and we need to probably, in my position, make sure that we are being strategic in how we are utilizing all of our assets.

We are not pursuing that at this time.

We really want both businesses to earn their keep and to provide a return on whatever investments we make.

Anything is possible but, right now, that's not something that is actively happening.

There would have to be a movement and a consolidation of a number of factors in order to make that happen.

But as you can imagine, as we do some of our long-range planning and start to talk about what we want to look like three, five, 10 years from now, that's probably a better inflection point for us to stand back and talk about maybe some of the versatility of the investments we make on new infrastructure in the future, and in a cyclical business as well, what's smart in terms of what's dedicated versus what -- our shared infrastructure.

So good question, but not one we are really actively pursuing in the short-term here.

Okay.

Thank you very much.

This does conclude the Q&A portion of today's conference.

I'd like to turn the call back over to our host.

Thanks, everyone, for joining our call today, and we look forward to talking to you in our next quarterly earnings.

And once again, I will refer you to our website at investor.

WGO.net for a replay of our call today.

With that, I'd like to wish you a great rest of the day and week, and look forward to talking to you in the future.

Ladies and gentlemen, this does conclude today's presentation.

You may now disconnect and have a wonderful day.