Winnebago Industries Inc (WGO) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2017 Winnebago Earnings Conference Call.

(Operator Instructions) And as a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Mr. Ashis Bhattacharya, Vice President of Strategic Planning and Development.

Sir, 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 fourth quarter, which ended August 26, 2017.

I'm joined on the call today by Michael Happe, President and Chief Executive Officer; and Bryan Hughes, 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 fourth 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 the call over to our President and CEO, Michael Happe.

Mike?

Thank you, Ashis, and good morning to everyone.

We are very appreciative of your interest in Winnebago Industries and for joining us this morning.

I'll begin today's call with an overview of the key drivers behind Winnebago Industries' fiscal 2017 fourth quarter and full year financial results.

We'll then turn the call over to Bryan Hughes, who will dive more deeply and specifically into those financial numbers.

I will return to provide some further context on the dynamic environment unfolding here at Winnebago Industries as our 4,000-plus team members work feverishly to restore market and financial leadership to this almost 6 decade old company.

While we are proud of our progress in fiscal 2017, as we speak, we are already in our eighth week of the fiscal 2018 year and extremely focused on our future.

More than 13 months ago, we set out on our fiscal 2017 year intent on accelerating our efforts to transform Winnebago Industries into a larger, more balanced, more profitable outdoor lifestyle company, providing a more compelling value proposition to our end customers, our dealers and our investors.

The phrase outdoor lifestyle was intended to both remind our employees that the business of providing high-quality, innovative products that enable extraordinary experiences by our customers in the outdoors, but also to give ourselves the permission to think more broadly about growth possibilities in the future around both the RV and adjacent lifestyles.

Our team responded in fiscal 2017 with a tremendous year of top and bottom line growth.

Full fiscal year 2017 revenues increased 59% year-over-year on strong growth in our Towable segment, reflecting the transformative addition of Grand Design RV to our portfolio and the further acceleration of our Winnebago-branded Towables business unit.

As we ended the fiscal year, consolidated revenues were fairly evenly split between our Motorized and Towable segments.

This is a far cry from the days when more than 90% of our revenue came solely from motorhomes.

We are better positioned than ever before to drive growth and to compete for market share across the whole of the growing RV spectrum using the best brand in the industry, Winnebago, and the fastest-growing brand in RV history, Grand Design.

In addition to expanding our future runway, we also set out in fiscal 2017 to deliver improved profitability.

Our overall gross margins improved substantially during the year with a 410 basis point gross profit improvement specifically in the fourth quarter, driven by a highly favorable product mix within the Towable segment.

We saw both organic profit improvement in the Winnebago-branded Towables business and certainly benefited from the acquired growth being delivered by Grand Design.

Thanks to the balance in our portfolio and the overall strength in our operating results, we've been able to improve several key financial metrics throughout fiscal 2017.

Our cash flow has exceeded our expectations and allowed us to divert some additional funds to pay down our debt ahead of schedule, with total debt reduction of nearly $69 million since the first quarter of 2017.

We've ended the fiscal year with a net debt to adjusted EBITDA ratio below 2.0, slightly surpassing our own internal projections and certainly on track with the deleveraging commitment we made following the GD RV transaction.

We also announced today that our Board of Directors has approved another quarterly dividend of $0.10 per share and additionally approved a renewed $70 million share repurchase program, both further reflective of our financial strength and our commitment to have all the tools necessary to deliver shareholder value over the coming years.

Alignment with our Board of Directors about our evolving capital allocation priorities is growing, and the toolbox is being assembled to provide the flexibility we need.

We will certainly remain focused on managing our debt leverage levels, directing capital to invest in profitable growth opportunities and always being aware of the liquidity needed to manage our business in the event of an industry or economic downturn.

Turning now to the segments and a more strategic review of fiscal 2017, before Bryan Hughes dives into the specific financial results.

Both of our business units in the Towable segment drove more than 40% retail growth for the year, with quarter 4 retail performance collectively hovering around 50% comp.

These figures are apples-to-apples when factoring in Grand Design's organic retail numbers prior to our acquisition.

The Winnebago Towables business spent much of fiscal year 2017 improving its product lineup, its channel partner strategy and its profitability.

Focused on quality over quantity, the Winnebago Towables line drove much of its growth from its restructured travel trailer line and creating newfound synergy around the Minnie product brand-naming franchise.

We are in the process now of further building out the Winnebago Towables' product lineup with the September 2017 introduction of a new mid-profile fifth wheel offering called the Minnie Plus.

This is a new 0.5 ton fifth wheel that builds on the success of the Minnie Plus extended travel trailer introduced last year.

By maintaining consistency in terms of brand and styling across the Minnie line of Towables, we are making it easier for our dealers to strengthen their knowledge of the Winnebago Towables' line and effectively qualify customers to the model that best fits their needs.

Internally, this streamlined approach is making it easier on our operations, sales and service teams to execute their plans profitably.

Excess is being stripped in favor of efficiency, and it is delivering market and financial results.

What's strategically exciting is that we now have a greater opportunity to introduce new customers into the iconic Winnebago brand at a much more affordable price point vis-à-vis the Winnebago Towables product line up.

If we can deliver a superior product and service experience, this Winnebago Towables customer will graduate throughout the Towables line and maybe someday into our Motorized offering, providing organic leaves for our core legacy motorhome business.

Turning now to the Grand Design brand.

We continued to see impressive growth and continued strong dealer demand.

Our products and the overall GD RV business model have significant resonance with end customers and dealers that has resulted in both market share growth, but also a double-edge significant order backlog [tile].

Market share is improving every day, with recent SSI reports hitting at a fifth wheel position for Grand Design in the market of more than 10 points of share.

The open house event in September in Elkhart was positive for the Grand Design brand, as they showed another strong lineup of products, including the new Reflection 150 Series fifth wheel, which further expands the market appeal for this solid line of products.

As announced earlier in fiscal 2017, we are investing 8 figures, dollar-wise, of capital into current capacity expansion on the Grand Design campus.

These projects remain on schedule with the first wave of capacity coming online in the fiscal year 2018 late Q2 or early Q3 time period.

Most of the revenue benefits will happen in the back half of the '18 fiscal year and into the fiscal year 2019 year.

We are committed to providing Grand Design dealers the very best quality possible while continuing to strengthen our product lineup and improving our ability to react more responsibly and expeditiously to their orders.

We aspire to keeping their showrooms and lots more full while maintaining turns and driving field inventory age even lower.

As we approach the 1-year anniversary of the Grand Design acquisition in early November, I would like to reiterate how pleased we are that the Grand Design RV team is a part of the Winnebago Industries family.

The integration process, while always delicate, has gone relatively smoothly, and we have seen synergies in year 1 modestly exceed our expectations.

We have benefited tremendously from the insights and expertise of the Grand Design team and are focused on sharing best practices as appropriate internally across all of our businesses.

We will compete vigorously in the market for share and collaborate strategically internally, while ferociously protecting the differentiation between the Grand Design and the Winnebago brands.

My sincere thanks and appreciation go out to all involved with the Grand Design acquisition and integration, but especially the 1,000-plus Grand Design RV employees who will fuel the everyday growth and market share capture that is occurring.

We are committed to providing the resources necessary to optimize Grand Design's full potential in the years to come.

Now Winnebago Industries' legacy has certainly been centered around its historic Motorized business, and we are determined more than ever to restore momentum to that segment.

In further reviewing this business and the strategies needed for future sustainable success, we continued to make decisions to simplify our approach in the market underneath our primary Motorized flagship brand, Winnebago.

Revenues for the full year were down just under 3% and slightly down more than 4% more for the quarter.

These top line results are both a combination of streamlining the product lineup and dealer base, but also further validation that we have not done an effective job of yet providing stronger value in key lower price point segments when the market moves there.

We must and will get better at that point.

The latest example in Q4 of fiscal 2017 was the dilution of share in Class C products where we are seeing competition become much more aggressive in the value segment of Class C. The impressive growth in shipments in Class A for Winnebago and over the year in Class B could not overcome the headwinds in Q4 unfolding for us in Class C. But more to come on our intentions in Class C in just a short while.

Our Motorized unit retail growth for the quarter and the full fiscal year was positive in the low single-digit range, but not strong enough given the momentum of the overall Motorized market to hold or grow share.

Our profitability was also impacted by lower-than-expected volume, higher-than-expected costs related to continuing manufacturing start-up efforts in Junction City, Oregon and a shift in product mix to lower margin SKUs.

We remain focused on our efforts to change the trajectory of this segment sooner rather than later, and we are beginning to see some early progress as we begin fiscal year 2018.

As we discussed in our last call, we are rationalizing our brand strategy, removing the cloned Itasca brand from our business model in motorhomes, we are rationalizing our product lineup and we are revisiting our channel partner strategy in every market of the country.

Every SKU and every market has been analyzed to ensure stronger competitiveness in the future.

Fortunately, our dealers expressed significant excitement with respect to our new fiscal 2018 Motorized product offerings when viewed at the industry's open house event in September.

Feedback and orders were materially positive as dealers saw early glimpses of this management team's commitment to overhaul the Winnebago motorhome lineup over time.

We unveiled 3 significant brand-new products this fall, the Class A Diesel Horizon, with what might be the most exciting interior introduced in mid-priced diesel motorhomes in many years.

The contemporary, modern, clean design approach on the inside and outside presents a million-dollar look at 1/3 of that number.

The Class A Gas Intent is a revolutionary approach to new product development here at Winnebago.

Designed from the wheels up in just over 9 months, which is light speed compared to our historical development cycle, this collaborative approach by all of our internal development functions has produced the most affordable Class A Gas offering ever at Winnebago, while still maintaining many of the core Winnebago characteristics we're famous for, including a commitment to superior quality and structural integrity.

What's also exciting about this new Class A Gas Intent product introduction is that we believe strongly that we can leverage both the internal development approach and the platform itself to more expediently address the value gap issue we have in the Class C category.

Stay tuned for further updates on this active Class C priority within our engineering department.

Lastly as it pertains to the new products, our Motorized team also went outside of the box to introduce the new Class B Revel, a one-of-a-kind off-road four-by-four experience that is sure to appeal to the active explorers looking to escape the grid and gain even more intimate access to the great outdoors.

This new product not only strengthens Winnebago's reputation overall as the leader in Class B vans, but in reality, extends the use case for a sprinter-based platform to further attract new users to the RV lifestyle.

Overall, while there is work to do in each of our segments, and especially Motorized, we are incredibly pleased with the consolidated progress we made in fiscal 2017 to transform Winnebago Industries into a larger, more profitable enterprise poised for growth in the future.

With that overview, I will now turn the call over to Bryan Hughes to review our fiscal 2017 fourth quarter and full year results in more detail.

Bryan?

Thanks, Mike, and good morning, everyone.

Fourth quarter consolidated revenues were $454.9 million, an increase of 73% year-over-year, driven primarily by the Grand Design acquisition and strong organic growth from the Towable segment.

Gross profit was $73.6 million, an increase of 131% year-over-year, with gross profit margins expanding by 410 basis points.

This increase was driven by product mix, including the addition of Grand Design and also included 60 basis points related to positive trends in our Towables segment, material usage and associated efficiencies that resulted in a $2.9 million favorable inventory adjustment in the fourth quarter.

Fourth quarter operating income was $43.5 million, up over 130%.

And net income was $24.9 million, an increase of 90%.

Reported earnings per share were $0.79 per diluted share, an increase of 61% over our $0.49 of EPS in the fourth quarter of last year.

We recorded amortization expense of $2.1 million in the fourth quarter associated with the Grand Design acquisition.

For fiscal 2017 as a whole, consolidated revenues were $1,547,000,000, an increase of 59% from fiscal 2016, also driven largely by the Grand Design acquisition.

As a reminder, the acquisition took place last November of 2016.

And as such, we will continue to have 2 months of annualization benefit in our first quarter of fiscal 2018.

Operating income for the fiscal year was $125.1 million, up 90%.

And net income was $71.3 million, an increase of 57%.

Full year earnings per share were $2.32 per diluted share, a 38% increase from $1.68 in fiscal 2016.

Full year amortization expense was $24.7 million pretax.

As illustrated in our consolidated statements of income, there were a few significant items related to the Grand Design acquisition impacting our fourth quarter and full year fiscal 2017.

First, additional transaction costs related to the acquisition were minimal for the quarter at $200,000.

For the full year, transaction costs were $6.6 million or approximately $0.14 per diluted share, net of tax.

Second, as I mentioned previously, amortization expense related to the definite live intangible assets acquired were $2.1 million pretax in the fourth quarter or $0.04 per diluted share net of tax.

For the full year, amortization expense was $24.7 million or $0.53 per diluted share net of tax.

We continue to expect ongoing amortization expense will be approximately $2 million pretax per quarter through fiscal 2021.

Finally, interest expense related to the debt associated with the acquisition was $5.3 million pretax for the quarter or $0.11 per diluted share net of tax.

For the full year, interest expense was $16.8 million or $0.36 per diluted share, net of tax.

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 items I just reviewed.

The schedules accompanying the press release show a reconciliation between net income and adjusted EBITDA.

As these schedules show, consolidated adjusted EBITDA for the quarter was $47.8 million, an increase of 158% year-over-year.

For the full year, consolidated adjusted EBITDA was $138.9 million, an increase of 123% year-over-year.

Turning to the individual segments, I will first address the Motorized segment.

Motorized revenues were $226.2 million for the fourth quarter, down 4% year-over-year.

For full fiscal year 2017, Motorized revenues fell 2.7% year-over-year, reflecting growth in Class A gas as well as with Class B, offset by declines in Class A diesel and Class C. The asset from the aluminum extrusion business had a 0.7 percentage point impact to the full year growth rate.

Segment adjusted EBITDA was $12.2 million for the quarter, down 31% year-over-year.

Adjusted EBITDA margins decreased by 210 basis points, primarily driven by pricing adjustments and costs associated with transitioning production to our Junction City, Oregon facility.

For the full year, segment adjusted EBITDA was $43.9 million, down 23% year-over-year and adjusted EBITDA margins decreased 140 basis points, driven by the same factors as in the quarter.

Switching now to the Towable segment, where revenues were $228.7 million for the quarter, up $202.1 million year-over-year, driven by the addition of $193.4 million in revenue from the Grand Design acquisition as well as continued strong organic growth from Winnebago-branded Towable products, which increased 33% versus last year.

For the full fiscal year, Towable revenues were $685.2 million, up $595.8 million from fiscal 2016, with $559.7 million in revenue from the Grand Design acquisition and 40% growth in Winnebago-branded Towable products.

Segment adjusted EBITDA for the fourth quarter was $35.6 million, up $34.8 million from the prior year and adjusted EBITDA margins increased 1,250 basis points, driven by higher volumes and a favorable product mix, including the inclusion of the Grand Design products.

As previously mentioned, Towable margins were also impacted by a $2.9 million favorable inventory adjustment, which had a favorable impact to adjusted EBITDA margins of 125 basis points in the quarter.

For the full year, segment adjusted EBITDA was $94.9 million, up $90 million over the prior year, and adjusted EBITDA margins increased by 840 basis points.

Turning to our balance sheet.

As Mike discussed, we continued to make very good progress paying down debt, reducing overall debt by $13 million during the quarter.

As of the quarter end, the company had outstanding debt of $274.6 million or $284 million of gross debt and debt issuance cost of $9.4 million.

Working capital was $147 million.

The debt-to-equity ratio was 62.2%.

The current ratio was 1.9, the quick ratio was 1.0 and net debt to adjusted EBITDA was 1.8 as of quarter end.

Cash flow from operations was $29.8 million in the fourth quarter and $97.1 million for the full year, an improvement of 42% and 84%, respectively, from the prior period in fiscal 2016.

The overall effective income tax rate for the fourth quarter was 35.1% compared to 31.3% for the same period in fiscal 2016.

The increase in effective rate is due primarily to higher pretax income associated with the acquisition of Grand Design without a proportionate increase in tax credits and other favorable permanent items that provide a benefit to the effective tax rate.

As Mike mentioned earlier, our Board of Directors recently approved a quarterly cash dividend of $0.10 per share, payable on November 29, 2017, to common shareholders of record as of the close of business on November 15, 2017.

Our board also authorized a $70 million share repurchase program.

This represents approximately 5% of our market capitalization.

That concludes my review of our quarterly financials.

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

Thank you, Bryan.

With fiscal year 2017 now behind us and already midway through our fiscal 2018 first quarter, I would like to share some thoughts about our approach moving forward.

With regards to the overall industry and macroeconomic trends, we remain cautiously optimistic that the positive RV industry cycle still has further runway to continue through much of our 2000 fiscal year -- 2018 fiscal year.

Industry shipments and retail remains solid.

And more importantly, dealer sentiment and general consumer confidence remains strong.

Economic conditions in North America remain steady.

And the key metrics we monitor, including such things as fuel prices, interest rates, the wealth effect, household debt, access to financing, field inventory, credit scores, while each has their own individual movement and characteristics, collectively, they are showing an environment for positive future RV sales, which is promising.

We are encouraged by the statistics from the RV Industry Association, showing more new users coming into the RV lifestyle and the widening appeal of the RV lifestyle due in large attempt to manufacturers increasing value within their products, but also using features to expand the use case appeal to new users to the lifestyle.

The new Winnebago Class B four-by-four Revel is a clear example of that.

And so we continue to invest in both projects that will enable growth, but also initiatives that should allow us to be more efficient and profitable as our company scales.

At this time, we now have 3 separate capacity expansion projects underway at Winnebago Industries.

Our new Motorized manufacturing and service facility in Junction City, Oregon has been in the process of being stood up throughout our fiscal 2017 year.

And fiscal 2018 should see a material increase in the number of diesel units being produced in Oregon versus their previous home in Iowa.

As we have previously stated, this transition allows us to use the Winnebago motorhome labor pool in Iowa to focus on our gas motorhome products.

Secondly, as mentioned earlier in this call, progress continues on the capacity expansion projects on the Grand Design RV campus in Middlebury, Indiana.

This growth project is critical in both allowing the Grand Design team the capabilities it needs to work its impressive order backlog down to something more reasonable in terms of serving the dealer.

But this expansion also enables Grand Design's ambitions to continue expanding its product catalog in the future.

The initial benefits of this expansion should begin to be visible sometime in the middle of our 2018 fiscal year and build over fiscal years 2019 and '20.

And lastly, as indicated in our press release, our Board of Directors has approved a $12.5 million capacity expansion plan for our Winnebago-branded Towables business.

With growing backlogs and our intentions to further strengthen that product lineup, this investment will enable us to meet expected increased demand and sustain momentum in the market around this business.

This project is not only going to increase our footprint, but will also allow us to create further efficiency in material flow processes and internal vertical integration activities like lamination.

The Winnebago Towables capital project will be in process through the rest of fiscal year '18 with financial benefits being realized during the fiscal 2019 year.

From a percentage growth standpoint, we have the 2 fastest-growing Towables businesses in the industry right now; and our commitment to those teams is to smartly provide the manufacturing capacity they need to fulfill their demand potential.

In several weeks, on November 2 in New York City, our executive leadership team and our Chairman of the Board will be hosting an Investor Day, where we will cover many topics, including an in-depth review of our emerging capital allocation strategy and priorities and some thoughts as to how we view the next 3 years unfolding here at Winnebago Industries, through fiscal year 2020.

We will remain consistent today and at that Investor Relations event in stating the 5 strategic enterprise priorities that have been in place throughout the transformation of our company.

Number one, we will build a high-performance culture, creating our own unique blend of leadership talent, an environment of accountability around key goals and a spirit of giving that is displayed both through internal business collaboration but also through our external philanthropic efforts.

Number two, we will strengthen and expand the core RV business.

With the strongest brand ever in the RV industry in Winnebago and the fastest-growing brand ever in the RV industry in Grand Design, we will partner with key channel dealers to energize our Motorized business and invest strongly in our Towable segment, driving positive total share increases for Winnebago Industries in the RV space.

Number three, we will elevate excellence in operations.

Our 3 main areas of focus are safety for our employees, unsurpassed product quality for our end customers and productivity improvements benefiting our shareholders.

Investments in talent, systems, lean discipline and an overall attitude that anything can be further improved will be key to our journey here.

Number four, we will leverage innovation and digital engagement, creating an advantage for our brands in terms of the connected customer experience.

We want to know our customers intimately before, during and after the sale, ultimately creating zealotry for our brands resulting in repeat and referral revenue.

And lastly, number five, we will look to expand to new profitable markets, both within and outside of the RV industry when and if the time is right.

Our focus today is very clearly on optimizing the assets that we have that are directed towards the North American RV industry.

We are also making excellent progress in driving our debt leverage ratio down to more acceptable levels, and we are engaging our Board of Directors, including just this week, on our emerging management thoughts about further new business development opportunities for Winnebago Industries.

In the midst of all of our change, our fiscal 2018 year will also include the celebration of Winnebago Industries' 60th anniversary on February 12, 2018.

We will appropriately celebrate 6 decades of tremendous impact that Winnebago has not only had on the RV industry, but the landscape of North American outdoor recreation.

An infinite amount of memories, through road trips, vacations, winter getaways, tailgating, excursions, et cetera, et cetera, have been enabled because of the products that our outstanding Winnebago team has created through the years.

We are proud of our legacy and we are proud of our team, but we will build on that legacy in the future.

And finally, on behalf of the executive team and our Board of Directors, we would like to thank the Winnebago Industries' employee teams in Iowa, Indiana, Oregon and Minnesota for their commitment to change in the right direction and their commitment to our dealers and our end customers.

None of the results or initiatives reviewed on the call this morning would be possible without the collective force and efforts of our 4,000-plus employees.

We are sincerely grateful to them and committed to strengthening the company in which they work for.

And now we will turn it back to the operator for this morning's Q&A session.

(Operator Instructions) And our first question comes from the line of Craig Kennison of Robert W. Baird.

Mike, the Towable backlog is massive.

I wonder if you could just talk about your weekly production capacity, especially in Towables, and how that might progress throughout the year as more capacity comes online.

Thanks for the question.

I'll certainly speak directionally to it.

I won't share specific daily manufacturing numbers.

But as I mentioned in my comments, I mean, certainly, it's a double-edged sword.

We are extremely excited about the orders that the Grand Design and that the Winnebago Towables teams have essentially created through their good work.

And the dealers are excited about those products and obviously have placed those orders.

Our approach to, obviously, working the backlog is coming through probably 2 or 3 different methods.

One is, is we continue to be more efficient and productive in output through existing facilities or resources.

And a good example of that would be, certainly within the Grand Design business, that team has done a tremendous job of improving their daily and weekly output on the same number of lines, organically, over the course of their first 5 years of existence.

So we work very hard every day, through their efforts, to increase daily output, and we continue to see that progress.

Obviously, the second approach will be the onlining of additional new manufacturing capacity through the building of some new facilities, but also the increasing capabilities of some of our vertical integration activities such as, I mentioned in the call, lamination capacity.

And so it's obviously a twofold approach.

It's something that we probably stress about every day here that we could be doing a better job of serving the dealers, and that there's even more retail that's potentially there to be captured if we can increase that capacity.

But the team is working at it.

And as quickly as we can get some of these manufacturing facilities and new lines onboard, you'll start to see some stair steps and hopefully, getting that backlog worked down.

So it's a good problem to have, but it is excessive to the degree that we've -- we're making more than $20 million now of capital commitments to the Towables businesses and working very hard to get those online as soon as possible.

And then Brian, you mentioned the $2.9 million benefit to gross margin, including some material usage benefit.

Could you just shed a little more light on that?

And whether it's a onetime impact?

Or something that would be more sustainable?

I guess I'm trying to get a feel for what your go-forward margin outlook looks like?

Yes, of course.

So here's how I would talk to that.

As we've grown in the Towables business and as we've brought capacity on our lines on, we established material usage factors that estimate the consumption of material through the manufacturing processes, right?

Of course.

We did a 100% physical count in the fourth quarter in our Towables business that substantiated the more efficient usage of those materials; or in other words, lower scrap or waste in the process than had been assumed in these new lines.

So really nice performance by the Towables teams in the production areas to drive that efficiency.

It's a favorable lift for the quarter.

But for the full year, I view it as the true efficiencies being reflected in the numbers.

And our next question comes from the line of Seth Woolf of Northcoast Research.

Mike, I just -- I guess, I wanted to get your thoughts.

I mean, there's been some talk in the marketplace about rising labor rates and OEMs kind of having to adjust pricing for -- to be compensated for that additional cost that they're getting from the suppliers, maybe keeping a little bit for themselves.

So just as you think about the supply dynamics in the industry and then you've got FEMA coming in, buying some units from the dealers, is there any reason to think that there would be any pushback on those -- these price increases?

Well, first of all, good morning, Seth.

Thanks for your question.

Well, let me kind of break that down into a couple of pieces if I might.

So material cost pressures coming either from the commodity market or through the suppliers.

Certainly, we see some of that, and I won't get specific into some of the numbers as to how much and where.

But we've had some pretty honest and straightforward and difficult conversations with some of our suppliers about some of the material cost increases that they're seeing.

And as much as possible, we certainly are trying to work those -- work the impact of those cost increases down.

And we do that through a number of ways.

One, challenging the supplier as to whether they can be more productive; number 2, we sometimes invite the suppliers into our facilities and say, hey, let's try to find efficiencies together; and then, number 3, we will combat that with some of our own sort of strategic sourcing initiatives that we've been working on for the last couple years here.

So I would say some of the material cost pressures have been real.

They are in the noise within our sort of gross margin improvement.

So we're still making tremendous headway in spite of some of that.

The labor pressure -- and you see most of that in the Indiana market, where much of the RV talent is centralized.

I would tell you we're in a really good position on labor in combating wage pressure for this primary reason.

We have 2 of the fastest-growing businesses out in that Indiana market, and we are attracting employees who want to work for businesses that have current momentum and the runway that many prospective employee candidates feel that we have.

And so in the way that they're compensated, growth is very important.

And so it helps us to offset the need to, per se, raise any of the labor wages significantly because we're having people come to us, especially around our Grand Design brand, that want to work.

So in terms of the market, Seth, believe me, we would love to be able to earn as much price as we can from our dealers and the end customers.

The competition continues to be both rational but also fierce.

And so I think we have to find smart ways to raise average selling price, improve gross margin with any pricing actions in the market.

And historically, through my career and I think this has been part of Winnebago's DNA as well, I think one of the best ways to do that is through differentiation and innovation.

And when we can introduce something like the Winnebago Revel, which is a one-of-a-kind product right now in the market, we should be able to gain more gross margin on that product than we might otherwise in a more crowded commodity-like vehicle offering.

So again, we're trying to do the best we can to offset some of the pressures.

It's more on the material side.

And we're trying to do, I guess, what we can do to smartly find gross margin improvement through pricing and, particularly, new products in the market.

Okay.

I guess just one more real quick one and then I have a question for Bryan.

But you've emphasized more -- you've put more emphasis on the open house this year because the growing presence of Towables, (inaudible) you had the new motorhome -- the new motorhome models that you introduced.

But is -- does that mean that -- can we still expect to see some new model introductions at Louisville this year?

Or have you kind of just put out everything into the open house?

Well, I wouldn't say we put everything into open house.

But I probably won't tip my hand via this call versus anything we'll introduce or show the rest of the year.

I think we'll introduce new products when they're right to introduce.

There may be a time when we're ready to make an announcement that doesn't happen around a trade show because we feel the timing's right, the product's right and we think we want to get started.

We felt very good about our open house week across all 3 of our business units in Elkhart at open house.

The teams did an excellent job showing strong product lines.

Our dealers were very excited about the new product that they saw from each of the business units.

And in terms of establishing sort of Winnebago Industries as a third anchor in the industry behind our 2 biggest competitors, I think we were successful there.

So the teams met their order goals.

And we're now on to executing against those orders for the year.

But by no means are we done introducing new products in our businesses.

We will continue to unveil those when the time is right.

Excellent.

And then, real quick.

Just Bryan, I know there's a lot of moving parts in OpEx line this year.

But as we go forward, I mean, even -- it looks like it's still kind of elevated from what we've seen the last 3 or 4 years.

How should we think about what that looks like in FY '18 and beyond?

And what's -- perhaps, what's the best leverage point with sales growth you've got kind of going forward?

Yes.

There is -- as you, I think, are alluding to, Seth, there's a lot of noise in SG&A, most notably from bringing on the Grand Design P&L and a slightly different make-up of the cost structure.

Most of the increases are obviously related to that.

We also have personnel costs, including variable compensation/bonus that are up year-over-year because of the strong performance this year.

We had a favorable legal settlement that we called out in our adjusted EBITDA last year.

So that's driving a year-over-year increase.

So there's -- the new office building that we opened in Minneapolis, building out the team for a growing company and making those types of investments.

There's a lot of things going on, obviously, that are, frankly, helping to contribute to our success.

So we'll continue to make the prudent investments where we need to and manage expenses aggressively, as every good company should do, but there's a lot of things going on there.

And so that's how I would answer your question for now.

And our next question is from the line of Scott Stember of CL King.

Could you maybe talk about the open house?

You alluded to the fact that the dealers were very excited, Mike, about the intent and some of the newer product.

Can you maybe just talk about -- granted it's only one product, but the -- how much leverage, with the Winnebago brand, do you think you can get just from that to get more of your product on certain dealer shelves before you even come out with the Class C model?

Well, I mean, that -- those conversations are certainly ongoing right now.

We unveiled the Winnebago-branded Class A Gas Intent that 3rd week of September in Elkhart, and dealer reaction to it was positive.

And we collected a fair number of orders, certainly, that week against it.

But we also come out of that week, and for the last 3 or 4 weeks, have been visiting with dealers in various markets about their intentions around that model and really some of the other new products.

So that work is ongoing.

This Motorized turnaround, per se, is -- it's -- it is very -- the words are tough to choose only because there's a lot of moving pieces.

And we're not -- obviously, new products are going to be critical to us starting to regain share on Motorized.

We have to introduce, not only more affordable products, but products that have more innovation and differentiation and stronger value around the line.

We had to have better line structure.

So really, when we have a conversation with a dealer, it's not just all about the Class A Gas Intent.

We're really rationalizing our dealer strategy to try to find what we feel are the very best dealers in each market across the country that fit not only who we are today but where we're going in the next several years.

And so those conversations are usually much more comprehensive than any particular new product.

Is the Class A Gas Intent, Scott, helpful to those conversations?

Yes.

We've had several dealers that we haven't done business with for some time that have wanted to reinitiate some contact, in part, because of that product but also because of, I think, some of the things they're seeing at Winnebago that they think, over time, are going to be positive.

I've been very clear, I think, maybe not convincingly so always on these calls, but we're having to take, at times, one step backwards in Motorized to go 2 steps forward someday.

And believe me, we're working hard at this thing.

And we were very excited in Elkhart at open house to show some of the new products that the team's been working on.

So lots more to come on that, and we'll see how it goes throughout fiscal '18.

Got it.

And you talked about Class C. It sounds like that's in this logical area for us to look for some models.

But what about a little bit further down on the Class A food chain?

There are some competitive models out there that are -- that go for less than the Intent.

Is that fair game as well?

Yes.

I think one of the things, Scott, any time you obviously create business strategies is you have to decide who you are and who you aren't.

Winnebago's reputation is certainly built more around the higher quality, more premium motorhomes.

And I think what you're going to see over time from Winnebago motorhomes is we'll have a much cleaner, good-better-best product line structure within each of the 4 categories.

It'll make more sense to our dealers as to where the different product names fit.

So that they can qualify a customer to either good, better or best.

The step-ups between those series will be more rationalized.

And again, getting out sort of the cloning business, over time, and we still do a little bit of that but we're not doing it with any new products going forward, that's going to help dealers have a little bit more elbow room within the markets to make some more money and to, again, not have to compete with sort of like product across the market.

So lots of work going on there in all the product lines.

But back to your question.

It is not our intent to be the opening price point leader in every category.

That's not who we are.

And while we know there'll be some volume there, we'll have to find other ways to drive market share as opposed to focusing most of our efforts on solely the opening price point.

There are larger, bigger competitors that are probably better suited to that.

We want to be more offensive at the entry-level price points.

But I'm not sure we want to be the best in the industry there.

We want to be the best in the industry probably again in differentiation, innovation and really, serving the dealer and the end customer with a total cost of ownership that is lower and an ease of doing business that's higher.

Got it.

And last question is about margins, just two-pronged.

Maybe just talk about Oregon.

I know that, that's weighed on your business this last year.

Is there a way to quantify the level of cost that will start to peel off in 2018 as the ramp up takes place?

And then, on the other side of it, you talked about, just on the Towables side of the business, these new facilities that are coming up.

Maybe just talk about start-up costs and what we could look for there, and that's it.

Well.

So let's start, if you don't mind, with the latter part of your question first, the Towables facilities.

So during the last call, I think after our Q3 results, we announced the Grand Design capacity expansion and mentioned that, that was a $10 million-plus investment.

Much of that work has been ongoing now for several months.

And as I mentioned in the call, you'll start to see capacity coming online midway through our fiscal '18 year.

But it will be kind of staggered in terms of the way it comes online.

So most of the capital investment or expense related to that will happen in our fiscal 2018 year, and you'll start to see the revenue benefits from the Grand Design capacity expansion in the back half of '18 and into '19 and '20.

For the Winnebago Towables division, it's a little bit more delayed story.

Similar to the question Craig asked earlier, we're working every day to increase our output there within the organic facilities.

But really, in fiscal 2018, this $12.5 million I referenced, that will be spent in all of fiscal '18.

And then, the revenue impact will really happen early in the fiscal '19 year.

And so it's going to take us a little while there.

We built our plan for fiscal '18 around organic productivity increases at Winnebago Towables.

So the team is working hard to get there organically.

But our '19 numbers should be reflective of some increased capacity there.

The Oregon standup has taken longer and been more expensive than we had projected.

I'm frustrated at that.

I know our team is frustrated at that.

But we won't rush this.

These are products that are $300,000 to $500,000.

They're beautiful products.

I think you're going to see most of the start-up costs really start to fall off here in the next quarter or 2. And we should start to see really the revenue and, hopefully, profitability benefits at some point of that happen in the back half of the year, maybe into '19.

So that's taken far too long versus our own internal projections from several years ago.

But we're nearing the end of, I think, those start-up costs.

And just one follow-up.

You mentioned the $10 million for the Towable facilities, just -- it sounds like Grand Design alone.

How much of that have you quantified will be expensed versus capital expenditures?

It's capital, Scott.

Our next question is from the line of Steve O'Hara of Sidoti.

Let's move on, operator.

He must've dropped.

Okay.

And our next question comes from the line of Gerrick Johnson of BMO.

I just want to follow up on Scott's last question about the CapEx/OpEx split.

So the full $22.5 million that -- between Winnebago and Grand Design capacity expansions in Elkhart, that's -- or in Indiana, I should say, that's all capital expenditure?

Correct.

It is and [we use] a 20-year life on that.

Okay.

So there's start-up costs associated with that?

We assume that OpEx would run a little bit higher for start-up costs or maybe cost of goods sold?

There's nominal start-up costs related to maybe some other expenses that you do.

But I would say that there's not a significant amount of those, to be honest.

It's mostly capital.

Most of the other resources are already in-house.

Okay, great.

Great.

That makes sense.

On gross margin, big increase there.

A lot of it Grand Design coming online.

So if Grand Design were in your portfolio last year, what would sort of a like-for-like gross margin look like?

You -- would you still be up?

Up significantly?

Maybe an order of magnitude what gross margin would look like if you had owned Grand Design last year?

Yes, we're not going to get into that disclosure, frankly.

But there is improvement still going on as you probably would expect from scale of the business as well as just of the Towables business as well as other efficiencies of -- driven by the team performing very well.

So we're not going to quantify that.

I can't get into that.

But there are organic improvements that are occurring.

Okay.

I have 2 more.

One quick one, a little bit more open-ended.

How should we present your financials in our model going forward?

Should we be pulling out the GD RV amortization and transaction costs or not?

Or how would you like that presented?

For the purposes of your reporting?

Yes, yes.

When we're putting out our numbers for you guys, your targets to hit on first, second quarter, do you want us to be pulling out the amortization or keeping that in?

How would you like us to do that?

Yes.

We're -- as you've seen here, we're showing the adjusted EBITDA, which obviously excludes the amortization component.

And so that's how -- a big reason why we're using that disclosure.

Otherwise, we intend to fully include, in terms of -- if we ever disclose operating income, it would be fully burdened with amortization expense.

Okay, great.

My last one's a little bit more open-ended.

What's up with Class A?

That was up pretty significantly.

Why was that up so strongly in the quarter?

Well, I mean, that's something we've been working on for a while now.

We had done some work with the Vista line specifically, and we had a very strong retail year in fiscal year 2017 on the Vista.

I think most of the increase in shipments was there.

We were pleased to see that, because I think the rumors were pretty rampant in the market that we were coming with a more affordable Class A gas product.

So to have a, really, a positive shipment period in fourth quarter on Class A. Prior to the launch of this entry-level Class A Gas Intent, we were pleased with -- as we said in the call, what we weren't as pleased with was, the Class C numbers were not very strong and that's where we have work to do, and we're working on it.

But it's -- the Class A gas side, we think we're in a better place than we have been in quite some time.

But you've got to stay on it because the competition will continue to move on you, so...

Your next question is from the line of Mike Swartz of SunTrust.

Just wanted to follow up on Gerrick's question and you had prefaced or mentioned the Class C side of that.

And I think even in your opening remarks, you had mentioned how maybe you'd fallen a little behind on Class due to some of the competitive activity in new products, et cetera.

Is that something that you're calling out that you just saw start in the fourth quarter?

Or is that something that's been going on throughout the year?

Well, our retail on Class C for the full fiscal 2017 year was actually slightly positive.

But that's not as good as it needs to be because the market has been pretty hot there.

And so again, this RV market and for those of us that are still relatively new to the RV industry, things can move very quickly.

Competitors can embrace or introduce new models pretty quickly and dealers will embrace new products and customers will move to those.

And so -- it's funny.

In the Motorized business, we have a pretty wide product line up.

One of the widest Motorized product lineups in the entire industry belongs to the Winnebago brand.

And I would say our ability to work across the whole of the line and to try to keep all the balls in the air in a competitive fashion, we've not been very good at that over the last 3 to 5 years.

And I think you're seeing some hangover benefits -- or excuse me, impact of that within our business model.

I can tell you very directly that, that will change in terms of what we call multigenerational product planning.

Every product manager, every product team that we have in the Motorized business is responsible for being on top of where the market is going to go, the customer trends through the voice of the customer, but really dictating, over time, the pace of competition.

And so that's another example where sort of the legacy Winnebago product development model just was not keeping up with the market.

And so now we have to race to keep up.

The good news is, is with the Class A Gas Intent new product development project, we got something to market in literally 8 or 9 months, which hadn't been done in a long time here at Winnebago.

And so we will really try to replicate that model on sort of white paper ground-up product development across the rest of our businesses, and we'll certainly extend platforms and common parts where we can as well.

So listen.

That's -- the downturn is our issue, not anybody else's.

We own it, and we'll fix it over time.

And you guys will hold us accountable to that.

But our teams will need to bring some stronger product to the market here.

And then, just last question on, I think, Mike, you talked about just being a little more strategic I guess on distribution within the motorhome business.

Could you talk about what that exactly means?

Does that mean more dealers, fewer products?

Or fewer dealers and maybe a deeper product portfolio?

I think what we're looking for, Mike, is that we want channel relationships that are largely strategic in the sense that we have a channel partner that is committed to the Winnebago journey we're on with reenergizing and turning around this Motorized brand and that we can commit to them as well.

And so in some markets, it means less dealers in terms of the sort of the number of, sort of, principles in the market.

That may not mean less outlets.

But we're just going to be very selective as to the dealers that we do, do business with.

In other markets, it might mean that we made some wholesale changes.

And as I referenced in my call, there are a few other dealers that we're going to begin doing business with again that haven't been working with Winnebago for some time.

So it's really a mixture.

We are just trying to emphasize that we want to pick the very best dealers that match our business strategy, not just in the Motorized business but in Winnebago Towables and Grand Design.

Each of the 3 business leaders is empowered to drive the channel strategy that they believe best fits their business model.

And then, where there's overlap, certainly, we'll try to take advantage of that with the dealers excitement around carrying a couple of pieces.

But -- and that's why I mentioned some of the neutrality or slight reversal we've been in, in Motorized is certainly due to us stepping back as well and rationalizing our dealer strategy and saying, "Hey, who do we truly want to be doing business with in the future?" And then, the transition to get to that point sometimes comes with some ups and downs.

Our next question comes from the line of David Whiston of MorningStar.

Just 2 questions.

First is on the balance sheet.

Your press release state you're emphasizing debt paydowns.

And I guess, I was under the impression you did not ultimately want to return to a debt-free balance sheet.

So can you just talk about how aggressive you want to be on that in fiscal '18, assuming the economy stays where it is?

Yes -- no, you're exactly right.

You understand us right, Dave.

We do not aspire to 0 debt on the balance sheet, but we are still working towards what we would view as a more optimal structure.

So we'll share more of that at our Investor Day meeting what our range that we're targeting is.

But suffice it to say, in 2018, we'll still be aggressively paying debt down.

Okay.

And on the overall consumer environment, the talks you're having with your dealers, are customers coming into the dealerships?

Are they just all caution to the wind, things are great?

Are they thinking, "Well, it's good, but it's not going to get better"?

Is there any kind of apprehension there?

Or is there really no fear right now?

Well, I wouldn't -- I'm not sure I'd ever label anything as no fear.

But I would tend to say, David, that it's still -- we still believe that consumer sentiment around the RV market is healthy.

And so we continue to see new users come into the RV market.

I believe a majority of the shipments this year were from new users into the RV lifestyle.

And so we continue to see people that want to get into the lifestyle.

We continue to see customers that want to upgrade within the lifestyle.

And our dealers continue to place orders under the assumption that, that will remain healthy for a little while longer for sure.

So dealer turns, the field inventory levels, and we focus on turns primarily because, especially with our Towables business is growing as quickly as they are, you're just going to naturally see the number of units going up in field inventory.

But so long as our turns are healthy in those businesses or within the acceptable range that we monitor, then we feel confident that things are stable.

So again, no canaries in the coal mine collectively.

Every now and then, you might see a data point that causes you to think a little bit more.

But I would say, the general sentiment from dealers and consumers is that they believe that this is a market that has some legs left in it.

And that's one of the reasons why you see us continuing to invest, especially in capacity expansion.

And our next question is from the line of Morris Ajzenman of Griffin Securities.

Just a follow-up on Class C. You've clearly highlighted the competitive pressures as it relates to lower price point product.

How long do you believe it will be before the company can really compete effectively as it relates to market share or any other metric you want to pick?

Will fiscal '18 show improvement or will it take longer for that to have traction where we can see better results as it relates to Class C?

Morris, thanks for your question.

Again, I won't get into any specifics in terms of tipping off our competitors, but it took us several years on Class A gas to respond to the entry-level momentum that was taking share from us.

It will take less time than what happened on Class A gas.

So all I can tell you is that we are actively engaged in that.

But we're also actively engaged in new products and the other parts of that particular Motorized business.

So the Class C business also has some presence in the rental markets, which Winnebago has good share of as well.

We think the rental markets are continuing to do well and companies that are in those rental markets continue to expand.

So it's a combination of trying to gain back some of that share.

But it will be -- the answer I'll give you is that it will be more competitive sooner than we were in sort of trying to fight the Class A pressures.

So stay tuned.

But we're definitely working on something.

Okay.

And as far as Class A is concerned, you've clearly shown improvements there.

In this coming fiscal year, will that improvement accelerate in your eyes?

Well, we -- I can't tell you what the market will do, but we certainly think with the restructuring of the lineup, with the new Class A Gas Intent, with repositioning the Vista above that and some of the other products, I think we're -- I think, it's fair to say that we have expectations for 2018 that are stronger than how we performed in 2017.

So the team is aware of that, and we wouldn't have made the investments in a new product line if they weren't expected to deliver those types of results.

So yes, we hope to sustain some better momentum in Class A going forward.

And again, we'll see how we do.

But we definitely have a new product to go to market with.

Last question.

I think following Katrina, there was a large order -- Minnie orders, FEMA for motorhomes and other sort of RVs.

Are you seeing that?

Is that -- will that be wrapping up in this quarter as an interim event?

I'll speak very directly to that.

You will not see really any material impact to Winnebago Industries' financial results due to any actions from FEMA.

They have certainly worked with dealers in the market to identify inventory that could be helpful.

FEMA though has placed much more emphasis on alternate forms of temporary housing than just RVs during this particular fall -- late summer and fall process.

And while they definitely have been engaging some members of the RV community -- Winnebago, in most of those storm recovery periods, it's the Towable side of the business versus the Motorized that is targeted by agencies like FEMA for temporary housing for storm victims.

We have not been a huge player in Towables and still relative to the broader market, we're still a pretty small player in Towables.

So the impact of any FEMA activities have been minimal in terms of benefiting us.

We've engaged our employees certainly to contribute to the Red Cross and other organizations.

But really going forward, we're not factoring in any significant lift from FEMA to our results.

We'll create better results with things that we control ourselves.

And our next question is from the line of Mike Baudendistel of Stifel.

You gave some good detail on when you think revenue is going to come online from your new Grand Design products.

Just thinking out a few years, do you think the opportunity in travel trailers in Grand Design could be as big or bigger than the fifth wheel revenue for Grand Design?

Well, certainly, travel trailers are a bigger part of the Towables market than fifth wheels, primarily because they're more affordable, the price points are lower.

So it's really probably a question of dollars versus share.

We have high confidence in the Grand Design team that's joined the Winnebago family.

They've continued to execute at an extremely high level since the acquisition.

And our commitment to them, Mike, is that we give them the resources they need to kind of fulfill the business plan that they have, the road map that they have down on paper.

And so whatever Grand Design decides to focus on and we certainly talk with them from a corporate level on that, we think they have an opportunity to create share in the market and share that probably will improve over time.

So and part of that just goes back to the overall business model that they operate the Grand Design brand under.

We feel very confident that, that business model is scalable.

And we've been pretty open and honest that -- we didn't buy Grand Design just to be a fifth wheel brand.

We bought Grand Design because we thought it was a great RV brand.

And so we believe they have a bright future.

Great.

That makes sense.

And just also wanted to ask you, over what period of time do you expect to repurchase the shares in the authorization?

Yes, we haven't specified.

Okay, so it's a long-term, undefined term, Michael.

And that's kind of our approach for now.

And at this time, I'm showing no further questions.

I'd like to turn the call back over to Mr. Ashis Bhattacharya for closing remarks.

Thanks everyone for joining our call today.

I hope your autumn is off to a great start, and we look forward to seeing many of you at our Investor Day in New York City in a couple of weeks on 2nd of November.

Thank you very much.

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

This does conclude the program.

You may now disconnect.

Everybody, have a great day.