Winnebago Industries Inc (WGO) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Winnebago Q1 2018 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Steve Stuber, Director of Investor Relations and Financial Planning and Analysis.

Sir, you may begin.

Thank you, and good morning, everyone, and thank you for joining us for Winnebago Industries' conference call to review the company's results for the fiscal 2018 first quarter, which ended November 25, 2017.

I am joined on the call today by Michael Happe, President and Chief Executive Officer; and Bryan Hughes, Vice President and Chief Financial Officer.

For those of you who do not know me, I joined Winnebago Industries in October from General Mills to lead the Investor Relations and FP&A functions.

I look forward to speaking, and hopefully, meeting many of you in the coming months.

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.

A news release with our first 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, Steve, and good morning to everyone on the call.

I know many of you have had the opportunity to meet Steve over the past several months.

And I want to reiterate how pleased we are to have him onboard here at Winnebago Industries.

In addition to his primary FP&A responsibilities working within Bryan Hughes' Corporate Finance team, Steve will also lead our investor relation efforts, engaging with many of you.

We are excited to have Steve's skill sets employed here at Winnebago as we continue our journey.

I would also like to take this moment and thank Ashis Bhattacharya on his previous stint as Investor Relations' lead here at the company.

Ashis did a fantastic job pinch hitting in a new role for many months.

As Vice President of strategic planning and business development, Ashis is now squarely focused again on the growth strategies we must employ to continue rebuilding this organization.

As we have done in the past, I will begin this morning's call with an overview of key drivers for Winnebago Industries first quarter fiscal year 2018 results, and then we'll turn the call over to Bryan Hughes for more specific details on the financial outcomes for this period.

I will return to provide some comments on other critical activities in play here at Winnebago, before opening the call for the questions and answers session.

We have stated simply in the past that we are on a mission here at Winnebago Industries to restore our flagship brand and parent company to market and financial leadership.

Fiscal 2017 was an immense year of transition as we work to both transform the portfolio of RV brands and products we own, as well as plant the seeds for further future investment in the outdoor lifestyle arena.

Our consolidated Q1 fiscal 2018 results, both in the market, but also financially, are reflective of the net positive progress we are making to this end, as we once again attain strong sales growth and margin improvement.

We are a healthier, larger, more profitable full-line RV competitor with significantly more runway ahead of us.

Consolidated revenues in Q1 increased nearly 84% versus first quarter of a year ago, driven primarily by a full quarter of Grand Design RV performance compared to just 3 weeks last year of GD RV in the same period.

Our overall gross profit margin increased 220 basis points as our Towable segment continues to grow at an accelerated pace.

Operating income rose just over 69%, and earnings per share reached $0.57 for the quarter.

Winnebago Industries' overall unit market share also continue to rise in the North American market with dealers also placing new orders, creating a positive backlog comp in each of our 3 business units.

We have stated clearly in past investor events, that our more balanced, dual-branded, i.e.

Winnebago and Grand Design RV strategy is well positioned to compete more effectively and profitably in the quarters and years ahead.

Turning to the reporting segments in more detail now.

Let's start with the Towables' transformation.

Revenues were up over $200 million for the quarter with adjusted EBITDA margins advancing 530 basis points.

Confirming the portfolio transition comments earlier, Towables represented more than 57% of our net revenues in this first quarter of fiscal year 2018, very different from the sub-10% position we were in during most of the last decade.

In early November 2017, we celebrated the 1-year anniversary of our acquisition of Grand Design RV.

We couldn't be more pleased with the integration of this business into our corporate portfolio.

Don Clark and his leadership team continue to drive superlative performance in the market, and set the bar for how to partner with some of the industry's leading dealer organizations.

Their profitable market share growth is truly a difference maker for Winnebago Industries and will continue to be.

Backlogs are impressive, dealer lot positions are improving and the Grand Design product catalog continues to get stronger and stronger.

Most impressively, the Grand Design business and our respective GD RV product brands, all achieved the RV Dealer Association's recent Quality Circle Award this past month as scored by the industry's dealers in a satisfaction survey.

Not only did GD RV repeat its achievement here as in previous years, but the GD RV brands were at the very top of the industry scoring for this award, there were no other brands better.

We are just as excited with our other Towables' business, that being the Winnebago-branded product line just up the street in Indiana.

Their own growth also continues to materially outpace the market with a revenue increase in the quarter over 50% and a backlog position that also continues to grow steadily.

The product line has been streamlined around the mini brand franchise, dealers are commenting on the positive product quality they're seeing and customer service levels are rising.

Profitability continues to head in the right direction in this business as well, and our long-term goal of providing a high level customer experience in the Winnebago brand at a more affordable Towables price point is something we are making significant progress on.

Transitioning to the Motorized segment.

While units' shipments rose slightly, revenue dollars were down just over 2% year-over-year.

Our profitability results in this segment were disappointing.

The 3 primary areas affecting our bottom line in motorhomes were higher than anticipated costs related to the new product line in Forest City for the Class A Gas Intent, ongoing expenses related to the ramp-up of our Junction City, Oregon facility, and rising material cost challenges within the period.

We are very focused on several different foundational changes in our legacy Motorized business.

A new ERP system is being implemented, a rationalized and more vibrant product line is being built.

Singular focus is now on our flagship Winnebago brand, increasing partnerships with more efficient dealer base is evolving, and more nimble and impactful new product development culture is happening, and a manufacturing base that is both more geographically diverse, but designed with improved lean and pull principles is being built.

However, these changes are placing more near-term pressure on the bottom line as we reposition this business segment for stronger, profitable market results in the future.

We do believe we are beginning to see progress as new exciting products hitting the street are driving an increased backlog, stronger retail and inroads with some of the largest regional dealers in the industry.

We have been very clear that fiscal 2018 is a key year for the Motorized segment to find its legs financially and with our customers.

Clearly, we have work to do here and significant focus remains on this business.

Again, overall, the consolidated results for Winnebago Industries in our first quarter represent a strong step forward in many ways and validate the importance of the portfolio transformation that is ongoing.

With that overview, I will now turn the call over to Bryan Hughes to review our fiscal 2018 quarter in more detail.

Bryan?

Thanks, Mike, and good morning, everyone.

First quarter consolidated revenues were $450 million, an increase of 83% year-over-year, driven primarily by the Grand Design RV acquisition and strong organic growth from the Towable segment.

As Mike mentioned, the first quarter of fiscal 2017 included 3 weeks of Grand Design RV performance.

Gross profit was $62.8 million, an increase of 118% year-over-year, with gross profit margins expanding by 220 basis points.

This increase was driven by continued accelerated growth and strong operational productivity in the more profitable Towable segment.

First quarter operating income was $31.2 million, up over 69%; and net income was $18 million, an increase of 53%.

Reported earnings per share were $0.57 per diluted share, an increase of 36% over our $0.42 EPS in the first quarter of last year.

As illustrated in our consolidated statements of income, there were 2 significant items related to the Grand Design acquisition impacting the quarter.

First, amortization expenses related to the definite-lived intangible assets acquired were $2.1 million pretax, or $0.04 per diluted share net of tax.

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

Second, interest expense related to the debt associated with the acquisition was $4.8 million pretax for the quarter, or $0.10 per diluted share net of tax.

As you may have seen, we announced earlier this month a successful repricing of a $260 million Term Loan B facility at an interest rate of LIBOR plus 3.5% versus the previous interest rate of LIBOR plus 4.5%.

We elected to draw on our ABL in the amount of $20 million prior to the reprice and use the proceeds to pay down the Term Loan B to take advantage of the favorable interest rate between the ABL and the term loan.

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 $35.4 million, an increase of 141% year-over-year.

Turning now to the individual segments, I'll start with Motorized.

Motorized revenues were $190.4 million for the quarter, down 2.4% year-over-year, largely due to shifts in product mix.

Segment adjusted EBITDA was $3.2 million for the quarter, down nearly 72% year-over-year.

Adjusted EBITDA margin decreased 400 basis points, driven by investments related to startup of new lines and increased operational and direct material costs.

A portion of the costs incurred during the quarter will not recur in Q2 and subsequent quarters, while a portion will continue as headwinds that will need to be mitigated through ongoing company cost savings initiatives and further productivity improvements.

Backlog increased over the quarter, thanks to recently introduced new products, which we expect to impact net revenues at a growing rate through the remainder of the fiscal year.

In the Towable segment, revenues were $259.7 million for the quarter, up $209.5 million year-over-year, driven by the addition of $195.4 million in revenue from the Grand Design RV acquisition, as well as continued strong organic growth from Winnebago-branded towable products, which increased over 50% year-over-year, as Mike mentioned earlier.

Segment adjusted EBITDA for the quarter was $32.3 million, up $28.7 million from the prior year, and adjusted EBITDA margins increased 530 basis points, driven by a higher volume and a favorable mix by virtue of including a full quarter of the Grand Design RV business.

Towable backlog remains strong, and as Mike mentioned, retail sales continue to outpace the industry for both brands.

Turning to our balance sheet.

We continue to pay down debt reducing overall debt by approximately $4 million during the quarter.

As of the quarter-end, the company had outstanding debt of $270.8 million, or $279.8 million of debt net of debt issuance cost of $9 million.

Working capital was $156.9 million.

And as mentioned earlier in December, we successfully refinanced our interest terms on the $260 million term loan facility, and we amended our existing $125 million ABL facility, further improving our borrowing costs and strengthening our balance sheet.

Cash flow from operations was $29.5 million in the first quarter, an increase of $29.6 million from the same period in fiscal 2017.

The overall effective income tax rate for the fourth quarter was 32.3% compared to 32.4% for the same period in fiscal 2017.

The rate in the quarter benefited from the recording of a favorable discrete item related to the adoption of the accounting standard on employee share-based payments.

This discrete item affected the rate by 2.2 percentage points in the quarter.

The rate for the first quarter of last year, likewise, benefited from a favorable resolution of uncertain tax positions.

Like all companies, we are anticipating the significant legislative changes and are working to understand the details of the legislation and their impact to our financial results going forward.

We anticipate that the ongoing impact to Winnebago Industries will be favorable, and we are further evaluating the one-time impact of the revaluation of our net deferred tax position.

Finally, our Board of Directors recently approved a quarterly cash dividend of $0.10 per share, payable on January 24, 2018, to common stockholders of record as of the close of business on January 10, 2018.

That concludes my review of our quarterly financials.

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

Thank you, Bryan.

The North American RV industry continues to grow and reach historic shipment and retail levels.

At last month's RVIA trade show in Louisville, Kentucky, the association projected that there would be more than 0.5 million RVs shipped from manufacturers in the United States alone.

This is a record number for the industry, and calendar year 2017 counts as the eighth consecutive year of recovery for the industry.

The underlying drivers of growth continue to be strong.

Macroeconomic conditions are steady, consumer confidence is robust, the equities markets continue to rise, access to financing is available and the costs of that financing are reasonable.

Fuel prices are affordable, manufacturers are focused on driving higher levels of value in their products, and customers are increasing their use case versatility for RVs, and younger generations are engaging in the great outdoors, ultimately migrating over time to the RV lifestyle.

While never completely certain, it does appear that near-term prospects for a ninth consecutive year of RV shipment growth in North America is not only possible, it's probable.

And Winnebago Industries has never been better positioned to take advantage of this growth.

Fiscal 2018 is off to a productive start, most certainly around the new products our teams are bringing to the market.

The Motorhome business has introduced 3 brand-new platforms since mid-September.

The new Class A Gas Intent is the most affordable Winnebago brand in Class A gas motorhome relative to the competition in many decades.

The new Class B Revell is quite possibly one of the hottest, viral online sensations of any product ever introduced at Winnebago.

Built for the extreme explorer on a versatile 4x4 platform, the Revel is gaining mainstream customer attention, and recently earned one of the best in-show awards at the RVIA trade show this fall.

The new Class A Diesel Horizon grabbed the ultimate trophy, winning RV of the Year by RV Business magazine at the RVIA show.

With its eye-catching, progressive, contemporary interior, setting a new bar for design excellence, not only at Winnebago, but also within the industry.

The Winnebago-branded Towables' division is extending its product catalog as well and continuing to leverage its mini-naming franchise with a new mid-profile miniplus fifth wheel.

And finally, Grand Design has sent a strong message to the market that its brand will continue to extend to new heights by announcing the introduction of the new Transcend, nonlaminated travel trailer, which will be produced late in our fiscal second quarter.

Differentiated with a multitude of customer-valued features, the Transcend, also a best in-show recipient at the RVIA event, allows Grand Design RV to bring its dealer-preferred business strategies to the largest segment in Towables, that being Stick-and-Tin.

The Transcend comes on the heels of the launch of the Reflection 150 Series fifth wheel line.

At the end of the day, this is still very much a product business, and our Winnebago Industries' teams and brands are looking to set the pace of competition with these new products.

It is important that Winnebago Industries ensures that we smartly invest in capacity expansion that allows us to both meet market demand that we've earned, but also doesn't result in overbuilding in a cyclical industry.

At the present time, we have 3 active capacity expansion projects underway: one, the diesel expansion efforts in Junction City, Oregon, along with the resulting motorhome assembly line reconfiguration in Forest City.

Two, the construction efforts underway on the Grand Design Campus currently resulting in ultimately 40% more square feet dedicated both to more lamination capacity, but also more assembly line space, particularly in support of the launch of the new Transcend Stick-and-Tin product just announced.

And finally, we are crossing the Ts and dotting the Is on the previously announced expansion plans for the Winnebago Towables' business, another 8-figure future investment in that fast-growing division to accommodate the robust backlog.

The new products and the expansion efforts you're all aware of, have always been planned in concert with one another.

We anticipate impact from the motorhome and Grand Design RV projects to start being visible in the back half of fiscal 2018 period, with the Winnebago Towables' project creating a revenue benefit beginning in fiscal year 2019.

As our strategic planning processes have progressed, we have centered our focus on the following 5 keys strategies that we believe will carry us through the fiscal 2020 year, and toward goals later described: one, we will build a high-performance culture, creating a unique blend of leadership, accountability and giving.

Two, we will strengthen and expand our core RV businesses, reenergizing the Motorhome business and investing in profitable, Towables' growth.

Three, we will elevate excellence in operations, driving higher levels of safety, quality and productivity.

Four, we will leverage innovation and digital engagement to create a more connected customer experience.

And finally, fifth, we will expand the new and profitable markets investigating growth inside and outside of the RV category.

And with an improving balance sheet, thanks to strong cash flow generated by the businesses and the debt restructuring efforts that Bryan reviewed just minutes ago, we are ramping up our business development processes internally here.

Along with a new capital allocation strategy, which places priority on organic growth opportunities and debt repayment, but also allows for possible redistribution of excess cash to our shareholders, Winnebago Industries is very much now focused on a 3-year planning horizon.

We recently communicated to our employees and the investor community, 4 new long-range goals for the end of fiscal 2020.

We first aspire to deliver 10%-plus unit market share of the North American RV industry, up from the 3% share we held at the end of the fiscal 2016 year, and the approximate 6.5% share we believe we hold in the market today.

Secondly, we target 10% operating income yield by the end of fiscal 2020, which is almost 200 basis points higher than our current end of fiscal 2017 level.

Third, we will drive to create 10% of our fiscal 2020 revenue from RV segments or new businesses that we are not present in today.

And fourth, we will be asking all of our 4,000-plus employees to be engaged in an activity related to employee safety, product quality, productivity or giving each of the next 3 years.

These 4 goals will be part of our own North Star constellation, which we will hold ourselves accountable to, as we drive to higher levels of market and financial performance in the years ahead.

With that, I would like to conclude our formal comments at this time.

Importantly, it is imperative to thank the more than 4,000-plus Winnebago Industries' employees in Iowa, Indiana, Oregon and Minnesota, that are dedicated every day to creating the very best experience possible for our end customers via our products and through the craftsmanship and passion that they display.

We are especially pleased our shareholders in December approved the introduction of a new employee stock purchase plan so that we can ensure each of our employees is transitioned to owner status soon within the company, regardless of brand affiliation or geography.

Thanks very much for your time today.

I wish all of you and all of our Winnebago teammates a very happy holiday season and a wonderful new year.

We are very excited about 2018 and hope all of you are as well.

I will now turn the call back over to the operator to begin the Q&A portion of this morning's event.

(Operator Instructions) Our first question comes from the line of Craig Kennison with Baird.

Wanted to start with the Motorized business that was maybe the one blemish on what was a terrific quarter.

That EBIT margin fell well below what we thought and maybe below your internal hopes.

Maybe just add a little more color to what happened in that business.

And then address the future, whether you think you can get back to 5%-plus EBITDA margin in that business in relatively short order.

This is Bryan.

I'll take that to start with and then I'll let Mike add on if he has any additional comments.

We mentioned a little bit during our call the things that drove our Q1 performance.

It was principally investments we are making in the new lines, including the startup of the plant in Junction City, Oregon, but also in North Iowa, as we prepared a new line for the intense production, as well as we also mentioned some moderate inflationary pressure.

I would say, and this kind of gets to your forward-looking -- roughly half of that margin decline in Q1 is from drivers that we do not expect to see repeat in Q2 and forward.

I'd say, the other half roughly will remain as headwinds as we move forward.

We'll continue to work on some of those headwinds in the form of low productivity will naturally abate as we continue to see improved throughput on our production lines, obviously, serving the recently introduced new products.

And then the inflationary pressures will continue as we always do to -- to work on those as well.

But those are the high-level comments I'd give you to address what happened in Q1 as well as how we're thinking about it going forward in Q2.

Mike, any other things you'd add?

Yes, I'll just -- first of all, good morning, Craig, and thanks for the questions.

I'll comment, I guess on the second part of your question that being our thoughts on the future.

The goals for the Motorized business internally remain very much the same in spite of any particular performance quarter-to-quarter.

This is a business, which we believe, has runway for market share improvement on the top line, and we believe we are beginning to take the steps necessary to improve both the product line and the dealer base and our relationships there in order to start that climb back.

And we think some of that is reflected in the backlog improvements that you're starting to see in that business.

I believe Motorized backlogs was up 15% quarter 1 over the previous quarter 1 a year ago.

In terms of profitability on Motorized, we are absolutely committed to getting the Motorized business to a level which is very much participative in that journey to 10% operating income or more in the 2020 horizon.

We have a little ways to go certainly, and we are very fortunate to have a Towable segment that is increasing profitability along with its concurrent market share increase as well.

But the goals for the Motorized business internally here remain the same.

So as Bryan mentioned, some of the costs are transitional, and hopefully, of the nature that you will not see those in future periods, but there are some costs that internally now we are working on that we will have to work diligently to get that gross profit margin to where we needed to be.

So I've been very clear since coming into Winnebago that especially on the Motorized business, this probably isn't a straight-line recovery for us back to a position of strength someday, and we're probably going to have to take a couple steps backward at times to go forward.

And we've been doing that a bit certainly on market share and the top line.

This quarter we saw a bit of an impact on profitability, but our aspirations, and candidly, our belief long term that we can take care of the bottom line as well is still very strong.

And just as a follow up to that.

If you look at the new products that you have in Motorhomes, your portfolio has changed a little bit.

If you just look at your overall margin profile for the new products, is there any change in the mix there that would lead to structurally better or worse motorhome gross margins?

I think you have to have to be determined a bit, primarily because quarter 1 did not have a lot of revenue related to new product shipping.

Most of quarter 1 was protected from the Intent, the Horizon and the Revel in the Motorhome business that we've discussed as new products.

You will begin to see the revenue benefit from any of those new products in more in the quarter 2 time frame.

There was a little bit in quarter 1, but more in quarter 2. Certainly, the things we're watching is the market shift to Class Cs and Class Bs.

We've done good work on Class A diesel, Class A gas, Class B with the 3 new products and we had -- have activity very much underway to be able to compete more effectively in Class Cs in the relative near future.

And so certainly with the market moving a bit to more affordable price points within each of the segments and a little bit lower ASP, very candidly, it probably does put a little bit of margin pressure overall on that category versus history.

But it's really up to us to ultimately drive that efficiency in manufacturing and strategic sourcing and some of those other areas that we believe can more than make up for it.

And if we can continue to come up with new products like the Revel, which is very unique and is driving a premium retail price in the market for the type of product it is, we should be able to have some of those products, have positive gross margin contributions as well.

So probably a mix of both.

But again, our goals remain the same and we've got many levers that we are going to try to go after to, again, continue to get this Motorized business going in the right direction.

And then quickly on the tax reform issue.

I realize it's just about to pass today.

But Bryan, if you had to frame, a range of outcomes with respect to your annualized tax rate, what kind of range would you guide us towards?

Yes, well you -- you guys can -- on the call can probably do the simple math going from the 35 down the 21 as proposed.

Offset by some of the givebacks, I'm not prepared to give specific numbers at this time.

I just don't think it's prudent to do so.

I think that your estimates and the simple math behind it are pretty much what I am using at this stage until we can get into the guts of the legislation and understand the puts and the takes.

Our next question comes from the line of Seth Woolf with Northcoast Research.

Just a couple of quick questions on the Motorized and one on Towable.

I guess, first on Motorized.

Mike, if you go back 2 years, is it safe to say that the recovery in the Motorhome business or the progress you've made is behind schedule?

Or is not where you would have liked it to be?

I know you're -- you wanted -- everybody wants it to happen right away, but how would you characterize it relative to your initial expectations?

Well, Seth, I appreciate the question and probably the way I'd answer it this morning is that regardless of my own perspectives back in January of 2016 when joining the company, were nowhere near the place where we want to be in that particular business.

And it is probably accurate to state that there are a number of factors that there -- that we're working through in order to, we believe, make the right moves to, again, improve the product vitality, to improve product quality, to improve our dealer relationships, to widening our advantage in customer service.

And then you combine that with an ERP system implementation and some of the legacy geographic changes in terms of manufacturing footprint that were already underway, there's certainly a lot that, that particular team and all of us are dealing with.

That being said, we think we're making very much progress on a number of fronts.

The ERP implementation is scheduled to go live less than a year from now.

Our product line is being rationalized and getting stronger.

We now track retail not only on the whole of our Motorized business, but we track retail on active products only as well.

And by that, I mean products that we know are going to stay into the line in the future.

And I'm happy to report that our retail on the products that are active, not the ones that are ultimately going away some day, are running at a significant comp above our total motorhome retail pace.

And so we believe that product line is getting better, and most importantly, we believe our dealer relationships are getting better.

But as we've talked this morning already, the timing of us returning to the strength that we'd like to see is probably the wildcard.

And I think we've been very transparent that we view 2018 as an important year to make that turn.

And we've never been able to single to you which quarter we'll have the results that you want to see.

But I think you're going to see progress in chunks over time.

And so, yes, I used the word disappointing intentionally in my comments, because it's not what we want to see, but we are not discouraged that we can't ultimately get there.

And we will continue to keep our head down and we believe do the right things.

And I just want to make one comment that this is why the transformation of committing to Towables' growth is so important to our enterprise.

And not only the acquisition of Grand Design, which has been obviously very accretive, but our commitment to reenergizing our own Winnebago-branded Towables' business as well.

It is imperative in order to get stronger that we become a full-line RV player, so that we have multiple tools in the toolbox to go to battle with.

And our Towables' businesses are -- certainly, have good momentum right now.

That does not mean that the Motorhome business has given up past long term.

We aspire to have all 3 of those flywheels spinning and are working hard to do so.

Okay.

I guess just the real quick on Motorhomes and then I have a Towable question, but the one thing that I've noticed is the last couple of quarters, I know it's a longer-term process that you guys are working through.

But it seems like the -- I mean, it doesn't seem like -- the backlog have been showing progress and signs of improvement the last couple of quarters.

3, in fact, I believe.

Yet, it hasn't seem to translate to the P&L the following quarter.

Is there any reason for that?

Or is it just a timing issue?

Any clarity there would be helpful.

And then just on the Motorhome -- or on the Towables side, anything you can talk about relating to the inventory.

69% is -- it's a big number.

Grand Design is doing well.

And I know the Winnebago-branded Towable business has been doing phenomenal, but if you could, in any way, disaggregate that, just help us understand what's Winnebago, the Towable, are you adding points of distribution?

Is it white space, the products?

How much of it is just the same dealers ordering more?

That's all I've got, but I would be really appreciated.

Sure.

Thank you, Seth.

I'll take the first part obviously in order here.

The Motorized backlog, as it relates to ultimately impact on the top line.

My opinion is that, that's probably a combination of a number of factors.

Certainly one is timing.

We are collecting orders from our dealers that essentially take us, in some cases, 6 months out in terms of either when the dealers want them, or when those new products are timed within our production schedule.

We're also seeing a mix difference in terms of Winnebago's performance on Motorized.

So while we're happy to start seeing Class A Gas come back, we're also seeing some shifts related to Class B and Class C. So our Class B business is very healthy right now.

We believe that, that market and our performance will continue to go the right direction.

But on Class Cs, the company is not where it needs to be, especially in the value part of that particular category, and as I mentioned earlier, we're working on it.

So we are seeing the units -- the unit increase on the top line start to happen.

I think the dollars are going to lag a little bit further behind as the mix changes.

And then as we ramp up some of these new products, the Horizon, for example, the new diesel, I think, we shipped a small amount to the market.

We shipped a small amount of Revels to the market, and the intent is really the one out there that we were able to get to market first, but still we've got tremendous amount of orders still left to ship and so I think, some of that's timing.

And the other part I might say is that we started this journey with 32 brands, product brands.

Those product names coming under either the Winnebago brand or the Itasca brand, we're now down to the mid-20s.

And so as we transition and rationalize that line down to something that's probably going to end up in the high teens potentially, there are some transitional costs and some impact on the top line as we essentially cradle those products sort of to end of life.

And so I think that's probably what's happening in that regard.

Towables' dealer inventory, certainly, it's a number we're looking at very carefully as well.

And I don't disagree that on its surface, 69% is a large number.

Good news is that the retail performance of both those businesses, and subsequently, the shipment performance are very similar to that number.

And so the backlogs continue to rise for both businesses.

Grand Design is a good example where you have a really still a new product in the Imagine lightweight travel trailer that's had tremendous success in the last 12 months, but that dealers are both still ordering, but also still stocking.

We're taking lot share from other competitors as Grand Design and Winnebago get stronger in the Towables' segment.

And then you're also starting to see the shift here with the -- while it's not showing up in dealer inventory yet, I think the introduction of the Transcend with Grand Design is really allowing dealers to consider whether they need all of their other brands on the lot as well that they are carrying.

And so as both the Winnebago and Grand Design catalogs get more full, our hope is that we can convince some of our best dealer partners that they might be able to carry 1 or 2 or less brands on their lots and shift that lot space over to us.

So our turns on those businesses are something we watch in addition to the aging.

I'm pleased to report that the aging inventory on Towables has actually been decreasing and is at a level that we are extremely comfortable with.

And our turns overall, we believe are in a good place for the type of business we have, which is a fast-growing market share-accretive business.

So good question.

Certainly one that we're thinking about ourselves and we'll continue to watch turns and aging in inventory very carefully.

Our next question comes from the line of Scott Stember with CL King.

Can you maybe talk about the Motorized side?

You talked about half of the issues that took place in the quarter will be going away.

Maybe just flesh them out a little bit more which are the ones that are transitory?

Which are the ones that are sticking?

I imagine the inflationary costs which you've talked about will persist.

And at least on that side, how are you addressing that through price increases or looking at maybe supply agreements, and just -- maybe just talk about how you look at that.

Yes.

So the one half of the EBITDA margin erosion I spoke to that I would not expect to recur is really related to those investments and the startup of the lines, Scott, both in Junction City, Oregon, as well as in Northern Iowa.

And so we've quantified what we believe those startup-related costs are and we think that those will be nonrecurring.

The ones that will continue to be headwinds are the productivity ramp-up.

When you have a new line starting up, as is the case with the Horizon and with the Intent, the number of units you're producing per unit of labor hour is much lower than what you might have historically had on other lines.

And so it's that productivity draw that I'm referring to, that will continue to be headwinds.

Now obviously as we ramp up production and get more efficient with these new lines, that will start to get mitigated in the coming quarters.

It's not an immediate flip.

It's something that you expect to occur over a period of several quarters.

Now as it relates to inflationary pressures, I would characterize those as moderate across all of our businesses.

We've seen increases as the industry has seen in several commodities including steel, aluminum and various wood products.

All of those have an impact to several of our parts, our components and subassemblies.

And so we manage the inflationary pressures by modifying features and benefits, new floor plans, changing our components, negotiating with vendors, and where necessary and where the market will bear it, we take pricing.

And so as you can imagine, in those businesses with a strong product offering and good profit is in place to make changes quickly to floor plans and other components and parts, we're able to fully offset those inflationary pressures.

In those businesses where we are not as well positioned from a product standpoint, such as is the case in Motorhome right now, we're less able to immediately offset those pressures and we'll rely on our cost-savings initiatives, product enhancements and developing favorable market position to offset those pressures over the longer term.

And there too, where necessary and where the market allows, we'll take appropriate pricing to ensure that we're receiving the right level of profitability for what we are offering to our dealers and ultimately our end customers.

So I guess that's what I would say about our Motorhome performance in the first quarter and what we expect going forward as it relates to the inflationary pressures.

Got it.

And you talked about the Winnebago brand, the Towables being up 50%.

What's the organic growth rate for Grand Design?

Just trying to get a flavor of what we could do looking forward once this thing is fully anniversaried in the second quarter?

Yes, so our footnotes in the queue will lay it out in such a way that you'll be able to calculate that yourself, but I would let you know that the organic growth rate for Towables on kind of a pro forma basis is in the 80% range.

So an incredibly strong Q1 by both Grand Design and the Winnebago-branded Towables business.

That 80% were pro forma (inaudible), I guess.

It's (inaudible)

Yes, exactly.

That's the one you'll be able to calculate based off of our pro forma disclosures.

So take that and compare it to the increase in the inventory levels and maybe that makes a little a bit more sense even to you then.

Got it.

Okay.

And been talking about the ERP system or maybe just talk about the operating cost.

Just remind us the puts and takes and plus and minuses last year.

I think you had all those transaction cost related to Grand Design.

You also had the accelerated amortization with the backlog of Grand Design.

But this year, there's a few other items which are going on, you don't have the reversal of the healthcare like you had in the first part of last year.

Maybe just talk about net-net or maybe on a quarterly run rate what we could be looking for, for operating expenses?

Yes, so I think you hit most of the ups and the downs in your comments there, Scott.

And we call them out in our disclosures in the earnings release as well.

So you got the acquisition cost and the transaction cost from the quarter last year related to Grand Design of about 5 -- little over $5 million and $5.4 million.

In transaction costs, we had the favorability last year that you mentioned in the postretirement health of $12.8 million.

You've obviously got the annualization of the new cost from Grand Design acquisition and having a full quarter this year versus the partial quarter last year.

And so you adjust for all those things, and what you're left with is a pretty nominal increase on more of an organic rate in our selling expenses.

The ERP expenses, that was another one that you referenced, you'll see that in our disclosures, while that's not a terribly material item quarter-over-quarter.

So we'll continue to have a run rate of expenses in ERP in the remainder of fiscal 2018 each quarter and then continuing into Q1 of 2019 as we finalize and prepare for the implementation.

So the net SG&A expenses, you strip out the noise from the acquisition annualization, the postretirement health, the transaction cost, and you get to a relatively stable organic SG&A spend trend rate.

And that's kind of what you would expect to see going forward as well.

Got it.

And just one last quick question on the tax rate.

You guys are full cash taxpayers right now?

Yes.

Our next question comes from Steve O'Hara with Sidoti & Company.

Can you just talk about maybe -- assuming tax reform goes through and rates decline opposite given the fact you're cash taxpayer, should be a big benefit to cash flow.

Can you just talk about maybe allocation of that cash flow?

Or maybe would it follow kind of your -- the outline you set out there at the Investor Day?

That's exactly how I would answer that question, Steve, is in our -- we wouldn't -- to the extent that we have favorable cash and we expect that, that would be the case on an ongoing basis as a result of the new legislation.

We wouldn't deviate from our capital-allocation strategy that we shared with you.

We started with evaluating our growth opportunities, both organic and inorganic, continued focus on debt paydown and our liquidity position.

Those would all be the immediate priorities.

And then, obviously, to the extent that we have excess cash, we'd return it to the shareholders appropriately, either through an increased regular dividend or some share repurchase activity.

So nothing shocking to share with you.

All very consistent with a strategy that we communicated at our Investor Day in early November.

Okay.

And then just moving to the Motorized segment.

Obviously, the -- you noted that the results were disappointing, but I guess you had talked about the expectation that 2018 might be the bottom for Motorized.

I mean, to some extent, it seems like that will be -- maybe the first quarter was the bottom in terms of some onetime things that hit the quarter.

I mean, do think that you've kind of hit bottom here or are we just kind of bottoming at this point, and you still kind of expect 2018 to be the bottom?

I respect, obviously, the intent of the question.

We're just not going to be in a position this morning to give you specificity on what month or quarter would be that definition of bottom.

There's so many different things at play here in that particular business.

It's a proud legacy business, which has been under pressure candidly for some time, much of the last 5 or 6 years in terms of market share pressure.

And it's got some legacy components to it in terms of vertical integration and the like that we are currently working on today as well.

And so -- and we're just not going to comment on whether we think Q1 was the bottom and Q2 is the definition of going forward.

As I said, I think it'll be a mixed bag.

You'll see elements, hopefully, over 2018 where our progress is being validated.

And then there may, in fact, still be some areas where, timing wise, we're not operating as efficiently as we'd like.

But it's a significant part of our business model, both in the present, but we plan to be a strong competitor in Motorized for many years into the future.

And we've got some good long-range plans that are somewhat guiding us.

But there are a lot of short-term issues that we're working on transitionally that, hopefully, will manifest themselves in better financial results in the future.

So again, I respect the question, but we're just probably not going to be able to give you a specific time.

Sooner is always better, and we're working on it as certainly as best as we can.

Our next question comes from the line of Gerrick Johnson with BMO capital markets.

I've 2 questions.

First on Towables, you are 80% organic shipment growth and inventory up 69%.

Just wondering if there any timing shift there, maybe anything pulled forward from 2Q to 1Q.

And then my second question, as you touched on before on price increases, but have you in fact been able to increase price to your dealers?

So I'll speak to the first comment, Gerrick, this morning, this is Mike, and then I'll turn it over to Bryan for the second half.

As it relates to Towables inventory build, there is a little bit of timing in the sense that this is the time of year, in fact, where dealer inventories probably rise a little bit as some of the new models from the fall trade shows are introduced to the market.

Certainly retail is a bit seasonal during this time, especially in the Northern markets as well.

So you do see a bit of inventory build during this time of year.

But that being said, what's really nice efficiency wise about the Towables businesses is that we are almost literally building to order.

We've got incredibly strong backlogs on both of those businesses, and each of the products that we're building essentially has a dealer name on it.

And so as those products come off the lot, they are shipped or transported to dealers as soon as they are ready and that final product quality inspection has occurred.

So the timing is, we build them as fast as we can right now.

We get them to dealers as fast as we can.

And hopefully, in many instances, they're being retailed as fast as they can, which is why we mentioned the aging inventory earlier.

We are seeing aging inventory going down, which is a very good sign.

It was not at all high to begin with.

But it's getting even better on the Towable side, which is a good sign for future turns there.

So the introduction of new products, like the Minnie Plus fifth wheel for Winnebago, the new Imagine lightweight travel trailer for Grand Design, and now coming up, the new Transcend Stick-and-Tin unit for Grand Design.

As you would expect in most durable goods businesses, you're going to see some sort of shelf space fill that occurs with new products as dealers take their first 2 or 3 or 4 units.

Certainly, they're going to look to retail those as best as they can, but they're looking to, obviously, secure a base of product to sell from.

So again, it's a big number.

We recognize that.

We're watching it carefully.

We think it's reflective mostly of the positive momentum we have in those businesses.

And we think the law of numbers will probably catch up at some time as these Towables businesses grow.

You'll see comps on things like dealer inventory just probably in some ways not be as high as they are today.

Yes, I guess I'll take the second part of your question on pricing.

This is Bryan.

Where we do this well, the way it happens is that new floor plans, new features and benefits to customers, this is an ongoing activity for us, okay, where we are constantly bringing those fresh looks to the marketplace.

And as we do that, we price it accordingly.

And where we need to do that to make sure that we maintain our profit profile or our profit goals, that's where we will build in the appropriate pricing.

And I say that is the predominant way that we address it.

It is, I'd say, rare that you would have an existing model or you've got no floor plan or features and benefit changes that you would say, let's take a 1% or 2% increase on our latest shipments of that consistent product offering, okay?

So the former is the more common scenario that we're dealing with, and that's how we like to manage our profit equation is through that form of pricing.

We are also looking at those situations where we just need to take a pricing on a consistent floor plan, consistent model.

I would say that, that does not favorably impact our Q1 results, but we'll be looking at doing those type of actions going forward.

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

Just wanted to touch on maybe what you're seeing from dealers in terms of how they're laying out there lots?

I know there's been talk over the past several years of maybe a general allocation away from some of the higher-priced motorhomes into Towable and into some of the value-oriented Motorized lines.

So I guess the question is, are you seeing a change in that cadence in that maybe strategic plan from the dealers?

And then how does that inform your product development innovation pipeline?

Well, I think, Michael, you're right that we are seeing that -- what you described in the dealer base and probably have been for some time.

But I'm not sure the dealers are doing as much as the end customers are going that direction.

I think one of the things that the RV industry has done relatively well collectively is that OEMs, in a very competitive recovery market, have been adding more and more value to their products per price point.

And I think this is probably the sign of a healthy, competitive segment.

But generally, OEMs, I believe, are introducing products with stronger value at what I kind of call the good/better parts of the good/better/best ladder.

And so organizations like Winnebago, who have been historically strong on better/best, have had to move more quickly here to offer a more rounded portfolio that gets into that lower-priced value segment that I call good.

And so we've been working on that.

The Class A Gas Intent is certainly one of those examples.

Our fastest retailing diesel is the opening price point diesel, the Forza.

But I think generally, you're correct.

You have seen during this recovery a move towards more value, feature-rich though, RV products on the market, both on the Motorized side, but very candidly on the Towable side as well.

Fifth wheels were hot for a while, they've slowed down.

We are very fortunate to have one of the best brands in Grand Design in the industry in the fifth wheel segment.

But Grand Design's growth rate now is being mostly driven by the travel trailers that they're putting into the market.

And so our multigenerational product planning has to be anticipative of customer needs in general.

But we definitely need to make sure that we are able to have a product catalog that is more diversified in terms of price points than we probably have ever had before.

Okay, that’s helpful.

Thanks for the color.

Just last one for Bryan, I just trying to get a sense of ERP cost for the year, I think if I heard you collectively, ERP cost in the first quarter was similar to last year?

Is that right?

And how to think about that on maybe a quarterly basis going forward?

Yes, they are probably a little less this quarter than Q1 of '17.

We'll have a spend rate that approximates in total capital and expense $2 million dollars to $2.5 million per quarter the remainder of this year.

And generally speaking, the way we've spread those costs that $2 million to $2.5 million between capital and expense is about 60-40 spread.

So that's how I'd advise you to think about that.

And then 60-40 being 60% capitalized?

Yes.

60 capital, 40 expense.

Okay.

May be a follow up on that, just where on the segment basis those ERP costs going?

I think all going into the Motorized segment?

Yes, effectively.

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

I guess a follow up from the analyst day, something I'm not still not very clear on Towable strategy for the Winnebago brand relative to the Grand Design brand.

Are you trying to move Winnebago brand up but stay below GD?

Or do you see Winnebago brand coming up in GD coming down but remaining premium?

David, this is Mike.

Thanks for the question.

Well, first of all, we have the intent of having 2 separate brands on the Towable segment.

The Winnebago brand is probably, in some ways, the more well-known brand from an end-customer standpoint because of its overall RV legacy, but it is the younger brand in terms of sort of product line maturity, in my opinion.

The Grand Design brand is certainly, we believe, a premium Towables brand that will continue to round out its product portfolio with a product offering that is more expansive across the multiple sub-segments of Towables.

And so the Transcend is a good example of the Grand Design brand moving into Stick-and-Tin, the largest subsegment of the Towables category, but yet the Transcend is a very differentiated product that will demand relative to most of the other Stick-and-Tins, a premium price point, but be very competitive for the product it is in terms of the features it offers.

So dealers will be able to make good money on the Transcend, and we believe Grand Design will as well.

Winnebago probably has less of a strong track record in the last 5 years in terms of the vitality and the strength of the product it's introduced.

And very candidly, its dealer base is probably a little less strong versus the Grand Design dealer base.

And we're working on both of those.

We really don't -- I really don't look at Winnebago versus Grand Design or Grand Design versus Winnebago.

We look at how each of those brands can create their own unique sales proposition relative to the 93% of the market that we don't have in Towables that we want to continue to go after.

And so that's -- I mean, that's really what we're trying to do.

And -- so I just generally don't think about them in terms of against each other.

We will not clone products.

You will see some strategic sourcing synergy between the products at times based on where we can work with the common supplier on a component that both teams want.

But the reality is, the Winnebago Towables team builds their market share, they will need to do that with products that earn their own place in the line.

Generally, they'll be a little bit more affordable than Grand Design, but we are not going to preclude Winnebago from rounding out their product catalog with more premium products as well.

Okay.

And then just 2, hopefully short ones, for Bryan.

First on the debt refi, the fact that you get 100 bps reduction, do you think that's a function of lenders recognizing when Winnebago is more diverse and therefore a less risky company to lend to or there are other factors?

Yes, think it's that.

I think it's a favorable marketplace, certainly, that we're entering into.

But we landed the pricing at the most favorable end of the range that we had gone to the market seeking.

And so I think it's result of a favorable market.

They're looking for opportunities or investors that -- they're looking for opportunities, such as Winnebago, that has, I think, proven our cash flow and our ability to generate favorable cash flow, the positive momentum of the business was certainly very favorable reception of the performance of Grand Design since acquisition.

So I think it's a lot of those things combined that helped us yield that favorable price.

And on the cash flow statement, there's a really big swing in free cash flow contribution from accounts favorable accretive expenses, can you talk about what's driving that change?

Yes, I don't think that there is anything systemic there.

I think that is just some timing.

And I don't think that there's any big change, and the metric that we watch is our days payable, outstanding DPO.

And I don't think there's anything big there, you should expect to model differently than we've been in the past.

Our next question comes from the line of with Greg Badishkanian with Citi.

Just a quick one, a follow-up on the Towable inventory question, which you talked about in terms of where you stand.

But when you talk to dealers and the people that you have in the field, what is the overall inventory looking like for Towables?

Is there an issue or are dealers basically comfortable with all the inventory?

Because obviously, if you have too much inventory of any one brand, that could lead to issues even if it's your competitors.

Greg, thanks for the question.

It is somewhat difficult for us to see the whole of the market from an inventory-level standpoint.

Our inventory finance partners are generally the stakeholders in our world that could give us some visibility to that in addition to certainly triangulating a number of other factors, like (inaudible) retail and some industry shipments and the like.

We are not hearing dramatic concerns from our dealer base about the total amount of inventory that's in the channel.

That being said, everyone is very cognizant that we are about to enter the ninth year of the an upward cycle here and that we all have to be very vigilant about any signs we see that could slow down the retail velocity from an end-customer standpoint in this market.

Again, fortunately for our 2 Towables brands, we are seeing market share growth, which is being supported by a strong dealer order base, which is being ultimately supported by good product lines and a good story.

And so we believe our inventory increase is within the boundaries of sort of a positive journey here to be a stronger player in Towables with both of our brands.

Like I said earlier, I'm not sure we expect that you'll see that type of inventory increase for multiple years in that particular reporting segment for us.

But to answer your question, we are generally not hearing inordinate concern from dealers about the amount of inventory they have, but like OEMs, they watch their aging inventory very carefully and I think OEMs, the dealers and the inventory finance partners are increasingly vigilant about managing that aging inventory.

So that doesn't get too stale and cause issues within any of the parties.

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

A question related to gross margins.

Previous to the acquisition of Grand Design few years proceeding that, gross margins probably averaged about 11% on an annual basis.

My question relates to next year (inaudible) you kind of get to where you want to be with motorhomes and particularly with a -- in more value proposition for customers.

What sort of profile do you envision for gross margins as it relates to motorhomes.

And then secondly, overall, gross margins in the previous quarter, 16.2%, 14% this quarter.

What sort of profile for the company do you see going forward for gross margins overall?

Well, Morris.

Again, thanks, for your call.

Good morning.

I'll add some initial comments here and then Bryan can jump in if he'd like.

As you probably aware, with Winnebago Industries historically being more of a Motorized business where 90% plus of its total revenues were coming from Motorized, no doubt the gross profit from that business was the dominant factor in the consolidated results.

And I believe there was a time that in the mid-2000s where the gross profit for the company was as high as almost 14.5%, and so that's been the high watermark with a portfolio that was largely Motorized driven.

And so we had to put an aspiration down we're we want to get back to some day.

I don't think it's unreasonable for us to expect that our Motorized team, in the future -- I'm not giving any timing care, but in the future, would climb back into the mid-teens for Motorhome gross profitability.

And so certainly, the results you see today are far cry from that.

As Bryan described, there's some transitional elements at play, but there's also few headwinds systemically that we'll have to manage going forward.

But our expectations for Motorized gross profitability are absolutely double digits.

And more so from my standpoint, they need to be into the mid-teens again.

But that will probably take some time in order for us to get all elements of the business model on that segment where we need it in order to achieve that, but again, we genuinely believe the gross profit levels you're seeing in this quarter are not where the business will operate in the future.

But we will need to prove that and we will need to show all of you and the rest of our investor base some progress in that particular area.

And the only thing I'd add, I think part of -- the second part of your question might have been a sequential gross margin question, is that right?

Q4 and Q1...

Yes.

Just trying to get some sort of handle, I guess.

You have a component called leased Towables.

What sort of -- if you can get sustainable gross margins in the mid-teens for Motorhomes, what sort of sustainable gross margins can you attain on the Towable side of the business?

Okay.

I had heard your question of 16% in Q4 down to 14% Q1, which is really some seasonal types of things that occur in Q1 here, primarily different pricing mechanisms incentives, et cetera, that we've always done.

The sustainable margins on Towables, look, if we've got positive momentum going there right now, I expect that positive momentum to continue.

I don't see anything that could disrupt the positive trends we've got going in gross margins in the Towable side.

I'll just leave it at that.

Can it exceed the mid-teens?

At gross margin?

Is your question on gross margin?

I assume it is.

And if so, I believe that it can.

Our next question will come from the line of Seth Woolf with Northcoast Research.

So really quickly, just was -- wanted to touch on Towable gross margin this year.

And I was off the call for a brief moment, so if you already said this, and I apologize I didn't check the transcript, but I just wanted to -- my sense going into the year is that it's not about gross margin -- consolidated gross margins on the Towables side, there was possibly -- there wasn't going to be room for a lot of expansion because while there would be growth, you guys are moving into lower margin categories, and so that was going to be an issue, especially with commodity prices.

However, there was a huge opportunity with the efficiencies on the Motorized side.

And as the product freshened up, you would have to use some of the incentives that maybe have been in place recently to get dealers to take these units.

So given the first quarter results, I mean, is that still a valid way to think about the year or should we rethink that or should I rethink that?

And then any other clarity you can provide on Towable's margins would be really helpful, I appreciate it.

I'll try to speak to both of those.

Really, for us, the most important variable to constantly keep an eye on is retail velocity.

And retail on the Motorized business is positive year-to-date.

And as I said earlier in the call, we're especially seeing more positive retail on those products that we know will be in the product line in the future.

And so we believe that with the dealers becoming more optimistic about Winnebago's Motorhome narrative and the product line that they're seeing from us, that the flow of that business from a shipment level and from a sales, allowance or support level will evolve into something that, hopefully, is somewhat fit to the retail momentum that we have.

And so we watch those discounts carefully and certainly any incentives that we need to do to earn business or even at times move aging inventory, but as we see good signs with retail and backlog on the Motorized side, we're probably more optimistic that we're not going to see some of the headwinds in terms of earning dealers business in the future there.

Towables margin, we did talk about that a little bit previously, but we do believe that we have 2 businesses that continue to not only drive market share growth, but also increase profitability.

Now both businesses are rounding out their catalogs in different ways.

The Winnebago business is moving up here recently with some fifth wheel product developments, and the Grand Design line is moving down segment wise into the Stick-and-Tin.

So there'll be some mix shifts over time that will naturally happen.

And in addition to some of the capacity expansion, you'll see some of those cost ultimately come into the business, and then we believe go away with increasing volume as well.

So there'll be a variety of factors, but we continue to be optimistic that the Towables businesses can operate with gross profitability at the levels they are today or, hopefully, slightly improved in the future as well.

So more work to do certainly there as those stories unfold, but certainly we've been very pleased in a positive way with how those businesses have driven gross margin in the last 4, 5 quarters.

I'm showing no further questions at this time.

I would like to turn the conference back over to Steve Stuber for closing remarks.

Great.

Thanks, everyone for joining our call today.

Lots of great questions and really good discussion.

If there are any unanswered questions that you have, free to give myself a call or e-mail me at srstuber@wgo.net.

As Mike said earlier, we wish you happy holidays and all the best for new year.

Thank you.

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

This concludes today's program.

You may now disconnect.

Everyone, have a great day.