Winnebago Industries Inc (WGO) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Winnebago Second Quarter 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.

Sir, you may begin.

Thank you, and good morning, everyone, for joining us for the Winnebago Industries conference call to review the company's results for the fiscal 2018 second quarter, which ended February 24, 2018.

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.

A news release with our second quarter earnings results was issued and posted to our website earlier this morning.

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

The company cautions you that forward-looking statements involve a number of risks that 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, everyone.

We hope you're all well.

We appreciate your time this morning as we review Winnebago Industries fiscal year 2018 second quarter results.

We have much ground to cover today, as I'm sure you would agree.

As is usually the case, I will first provide a high-level summary of the quarterly results, and then be followed by our Chief Financial Officer, Bryan Hughes, who will go into much more detail regarding our financial performance.

I will return with closing comments outlining our progress on key strategic initiatives and offer a few thoughts about other relevant topics.

And undoubtedly, you'll have a few questions for us that we can answer in our Q&A session.

Our second quarter performance continues to reflect the journey we are on here at Winnebago Industries, to build a more robust, balanced, increasingly profitable overall business model.

Much has changed in recent quarters at Winnebago Industries, and our results this period are both a reflection of those accomplishments, but they also highlight that we continue to have unfinished work to do.

This will be a net positive journey, we believe, and we are pleased with our consolidated results in the second quarter, which are record numbers on both the top line and in profit generated.

Overall, strong sales growth and meaningful margin improvement for the company were hallmarks of this quarter, certainly highlighted and generated by our impressive growth in the Towable segment.

Again, another reflection of what's changed in the last 2 years.

Consolidated second quarter revenues rose 26% year-over-year and marked the first comparable quarter that fully included Grand Design RV as part of the Winnebago Industries portfolio in both the prior year and current year results.

We're pleased that overall revenue continues to grow organically and profitably at a strong pace.

Gross margin increased 110 basis points, driven primarily by accelerated growth in the Towable segment.

Both Towables businesses are delivering solid profitability, as they both gain share.

Looking at the segments in more detail.

Starting with the Towable side, revenues increased 55% year-over-year, which again represents entirely organic growth now that Grand Design RV has been part of Winnebago Industries for over a full year.

Margins also expended due to both fixed cost leverage and net cost savings initiatives that continue to incrementally contribute to improve profitability in this segment.

The Towable industry segment remains healthy, continues to grow, and importantly, we as a company are capturing meaningful shipment and retail market share across the segment with both the Winnebago and Grand Design brands.

Both Towable businesses had retail performance in the quarter which significantly outpaced the industry.

Backlog for the quarter was up 10% to over 9,000 units, which is compared against a particularly robust backlog from a year ago, which if you recall, included the continued dealer ramp-up of our high-demand Reflection and Imagine series, combined with capacity constraints within the Grand Design business.

We believe this backlog supports our future growth expectations in the Towable segment.

Our current plants in Indiana have been running efficiently, and new capacity has begun to come online within the Grand Design business midway through the second quarter.

Initial interest in our recently announced new Grand Design RV Transcend line has been tremendous.

The Transcend officially launched in January, with production just now beginning to reach material levels and represents Grand Design's entree into the largest segment of the Towable market, the introductory travel trailer segment that we have not had a presence in before.

We are still metering our deliveries on Transcend to dealers across the country, and we'll see this reach a more normal flow throughout the back half of the year in terms of orders generated, retail and shipments.

In addition, the Winnebago-branded Minnie Plus Fifth Wheel, introduced last fall, also is now reaching normalized production rates and being taken on to dealers' lots, generating more lot share and exhibiting good, early-season retail performance.

We are fully aware that the eyes of the financial community often wander to what can be improved when a company's financial results are released or the comparative against previous periods, but we are also quite proud of the significant progress Winnebago Industries has made as an entity in the Towable segment in just 18 short months.

The Grand Design acquisition has been strategic and effective, and our own Winnebago-branded Towables business is growing rapidly as well.

In an industry where 85%-plus of the units are towables, we have advanced our Towable segment share from less than 1% market share at the beginning of 2016 to somewhere in the mid-single digits presently.

And most importantly, doing that with favorable margins.

We are optimistic about the ability of our Towables businesses to make materially more progress in the market and help generate net positive results for the company in the future.

Our Towables brands are becoming a stronger, viable choice for dealers and end customers looking for alternatives to their long-held competitive options.

And we are aligned on our core differentiation principles of product quality, innovation and customer service support.

Turning now to the Motorized segment.

We are slowly but assuredly making progress in our sales results.

Shipment numbers were light versus the industry's overall numbers, but both Winnebago dollar and unit shipments showed a positive comp versus our own second quarter a year ago.

Component availability limitations on several new products provided an unexpected headwind versus what was possible in the quarter on the top line, and we are working intently to mitigate those availability challenges.

We are also working to manage down some less-than-desired historical sales discounts to occasionally move our inventory.

And while our sales allowance support levels are down year-over-year, this industry doesn't always reward those good intentions immediately, especially in light of other competitive activity and incentives.

However, we are extremely pleased that Motorized retail growth improved quarter-over-quarter with double-digit percentage growth, reaching levels that are in line with the overall industry pace, and thus, demonstrating point-in-time stability in retail market share for the first time in several years.

The Motorized backlog was up more than 42%, reflecting solid interest in our new products and increasing confidence in our future by dealer partners.

Our optimism is growing about the traction that we're beginning to slowly see in the marketplace.

We are becoming more competitive.

Initial retail sales of our new Motorized products, including the previously announced Intent Class A Gas, the Revel Class B and the Horizon Class A Diesel have been on pace, notwithstanding a few of the component availability issues I mentioned earlier.

And we look forward to continued revenue benefit from these new product lines in the back half of fiscal 2018.

During the second quarter, we also worked on a new Class C product, which was just unveiled early this March, at the beginning of Q3.

The new Outlook, a Class A Gas Motorized product, is the younger brother to the Intent platform, broadens our portfolio in the Class C gas line up, especially into the value category and the rental markets and continues our recent track record of introducing new products with stronger customer appeal, better value with a shorter product development cycle.

In the case of the Outlook, we have targeted an affordable price point, much like we have done recently with the Class A Gas Intent, and look to see Class C share erosion moderate in coming months.

Shipments on this new product will begin later in the third quarter.

While we are encouraged by the improving stability of our Motorized business facing the market, driving acceptable profitability continues to be impacted by the manufacturing investments that we are making to both restart facilities like the one in Junction City, Oregon, but also to remake manufacturing lines in Forest City.

In addition, we are seeing some net challenges from rising material cost in the motorhome segment and some product line mix shifts as we more vigorously defend market share.

We are focused on addressing all of these challenges and certainly improving profitability long term in our Motorized business as we continue to make foundational operational improvements to the business.

There are many tools at our disposal, including select price increases that will happen with the advent of our 2019 model-year units.

While we believe we are on the right path to ultimately improve Motorized profitability, this won't be an overnight fix, rather a gradual but certain ascent to stronger performance.

I'm personally not very patient on this front, but we continue to take a methodical approach to the turnaround process.

And with that overview, I will now turn the call over to Bryan Hughes to review our fiscal 2018 second quarter financial results in more detail.

Bryan?

Thanks, Mike, and good morning, everyone.

Second quarter consolidated revenues were $468 million, an increase of 26% year-over-year, driven primarily by strong organic growth in the Towable segment.

As Mike mentioned, the second quarter of last year, fiscal '17, was our first full quarter following the acquisition of Grand Design RV.

So we've now fully lapped the transaction and reported growth of 26% is, thus, fully organic.

Gross profit was $67.7 million in the second quarter, an increase of 37% year-over-year, driven by continued growth in the more profitable Towable segment, which accounted now for 57% of total revenues for the quarter.

Gross profit margins expanded by 110 basis points, driven by mix of business and fixed cost leverage from the Towable segment.

Second quarter operating income was $35.3 million, up over 24%, and net income was $22 million, an increase of 45%.

Earnings per share were $0.69 per diluted share, an increase of 44% over the $0.48 EPS in the second quarter of last year.

You should note, for comparison purposes, that the second quarter of 2017 included a $12 million benefit relating to the termination of our postretirement health care plan.

Finally, also recall that last year also included heightened amortization associated with the Grand Design deal.

As a result of the recently enacted Tax Cuts and Jobs Act, the company recorded a $2.3 million or $0.07 per share net benefit in the second quarter.

We have provided non-GAAP EBITDA and adjusted EBITDA performance measures in our press release as a comparable measure.

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 $39.4 million, an increase of over 35% year-over-year.

Turning to the individual segments.

In the Towable segment, revenues were $266 million for the quarter, up 55% year-over-year, driven by continued strong organic growth across the Grand Design RV and Winnebago-branded lines.

Segment adjusted EBITDA for the second quarter was $35.3 million, up nearly 94% from the prior year.

And adjusted EBITDA margins increased 270 basis points, driven by fixed cost leverage on strong top line growth.

Towable backlog remained strong at over 9,000 units, growing 10%, but as mentioned by Mike, this number compares to a backlog in the prior year that was at elevated levels due to the ramp-up of a couple of our key products.

Retail sales continue to outpace the industry for both the Grand Design RV and Winnebago-branded lines.

Motorized revenues were $202 million for the quarter, up 1.5% year-over-year, supported by recent stability we are seeing in our retail momentum.

As Mike mentioned earlier, backlog increased over 42% or over 900 units, reflecting the strength of our recently introduced new products.

Segment adjusted EBITDA was $4 million for the quarter, down nearly 63% year-over-year, and adjusted EBITDA margin decreased 340 basis points, driven by manufacturing startup investments and increased material costs.

We are also facing year-over-year margin headwinds from product mix, as the Class A Diesel business was slow in the quarter compared to last year due to the ramp-up of our new facility that assembles the diesel product.

And at the same time, we increased, in second quarter, the production and sales of the value-priced product as part of our efforts to fill the gap that existed previously in our product line-up.

Turning to our balance sheet.

As of the quarter end, the company had outstanding debt of $271.1 million.

That's comprised of $279.7 million of debt, net of debt issuance cost of $8.6 million.

Working capital was $177.1 million.

Our current net debt to adjusted EBITDA ratio is 1.4, on track with our deleveraging expectations and in line with our targeted leverage ratio range of 0.9 to 1.5 as communicated last November at our Investor Day.

Cash flow from operations was $15 million in the first 6 months of fiscal 2018, an increase of $9.9 million from the same period in fiscal '17, driven by continued profitable growth and changes in working capital.

As I mentioned earlier, we recorded a $2.3 million or $0.07 per share net benefit in the quarter as a result of the recent tax reform legislation, and our blended effective tax rate was 27.2%.

Included in these figures is a $1.4 million charge related to the remeasurement of net deferred tax assets.

But this charge was more than offset by the benefit associated with the reduction in the federal tax rate.

Since we are on a fiscal year that differs from the calendar year, we project our blended reported tax rate will be 29% for fiscal 2018.

For the year, we expect tax reform will contribute a $0.10 to $0.12 per share benefit, net of the reinvestments we are making in the business that Michael will speak to further in a moment.

We currently estimate our ongoing rate to be further reduced for fiscal 2019 as the full fiscal year realizes the benefit of the lower federal statutory rate of 21%.

Finally, our Board of Directors recently approved a quarterly cash dividend of $0.10 per share, payable on April 25, 2018, to common stockholders of record as of the close of business on April 11, 2018.

That concludes my review of our quarterly financials.

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

Mike?

Thanks, Bryan.

I would like to first expand on Bryan's comments regarding Winnebago Industries tax reform distribution intentions.

We have committed to passing on a portion of the tax reform savings to benefit our dedicated employees in the form of four distributions.

One, each employee will receive a onetime bonus from the company, split 50% in cash and 50% in a stock award.

Two, we will target certain areas of the organization with select wage adjustments to ensure we are market competitive in key roles.

Three, we are making a seven-figure donation to our Winnebago Foundation with the specific purpose of identifying targeted opportunities in the future to give back financially to the communities that our employees live and work in.

And number four, we will make specific capital investments in improving the workplace environments in which our employees gather and work.

Our employees are learning about these intentions concurrent with this morning's release.

On the employee front, we also want to highlight that our recently announced employee stock purchase plan, which was approved by the board and shareholders last quarter, has been launched.

We seeded this program with an initial offering of shares for each employee, with the hopes that our employees view this program as a great way to enhance our teammates' connection to the organization and provide them with a direct avenue to personally benefit from our future successes.

We are intent on building a stronger, high-performance ownership culture.

Many of you are likely looking for what we believe about the future prospects of the North American RV industry.

As a whole, we remain cautiously optimistic that the calendar year 2018 will see another positive increase in shipments and retail in North America.

The RVIA recently released an updated forecast for 2018 and is projecting wholesale shipments for the U.S. on the magnitude of 7% up for the year.

We have no reason to believe at this time that the industry projection is not a good starting point.

Each month will unveil ultimately its accuracy.

We still believe that the secular trends driving increasing popularity of the RV lifestyle are real, and that the macro academic -- economic conditions are relatively stable.

There is certainly more noise in the media and on The Street about the return of volatility in the equities market, the risk of increasing interest rates by the Fed, and the possibility of cost pressures from steel and aluminum tariffs or inflation in general.

And all of those may, in fact, be very real things to watch and manage in terms of its impact on consumer confidence.

However, foot traffic and buying interest and results at various RV retail shows across the country has generally been quite solid, not foreshadowing a material and sudden decrease in consumer interest in RVs this spring or summer.

Overall, dealer sentiment remains stable in the RV industry.

And we believe that dealer confidence in the ongoing narrative of what Winnebago Industries and our brands are building is increasingly positive.

We recently completed a Winnebago-brand national dealer meeting in San Diego in early March, the first meeting of its kind in 4 years.

It was a very positive opportunity and event for us to tell our story to dealers about the progress we are making to build a stronger flagship brand and a stronger company.

We also used the opportunity to visit with dealers and suppliers about the state of the industry, and especially current inventory levels.

The consensus, from our point of view, is that inventory levels are in fact balanced, not aging significantly, and dealers are positioned to serve the retail needs of the customer in the spring and summer months ahead.

In fact, potentially better positioned than they were a year ago.

What I believe is more important than dealer inventory at the present time, though, is the manufacturing output pace of the OEMs in the months ahead.

Manufacturers have done a good job in the last year of driving production to record levels, and in many cases, adding new capacity.

It is in Winnebago Industries' best interest and that of all of our competitors to continue to ensure that we manage our production pace to the pace of both retail and dealer stocking level demand, regardless of whether that will be really positive in the future or not.

We are aggressively managing aging inventory in the field, and we are pursuing increased lot share due to the momentum, especially of our Towables businesses.

Our Motorized turns in the field are up, and our Towables turns are steady.

We will keep a close eye on our own production output and the inventory levels that we carry ourselves.

This isn't a sign of skepticism, it's a simply good business practice.

In line with those comments, we are, though, continuing to make progress on our recently announced Towables capacity expansion projects.

A portion of the Grand Design RV capacity came online as expected in January, with an additional phase coming online later this spring.

We are continuing with the Grand Design capacity expansion projects.

We are also now ready to launch our Winnebago Towables capacity expansion project with the recent closing of land contiguous to our current campus in Middlebury, Indiana.

We expect that we will see the financial benefits of the Winnebago Towables expansion in the front half of fiscal 2019, particularly around second quarter of that year.

If we are to reach our goal of 10%-plus overall unit RV market share by the end of fiscal year 2020, these Towables expansion projects will be critical to that end.

Lastly, we are pleased with the increasingly positive state of our balance sheet.

Last November, Bryan Hughes shared our overall capital allocation priorities, and also communicated where we would like to be in terms of a leverage zone.

We must certainly protect the company's long-term interest and have a path to ensuring that we can weather a material downturn that could happen in the future.

But we have also been transparent about our intentions to smartly use the balance sheet to drive profitable growth and deliver increased shareholder value.

We have begun to enter the high end of our leverage comfort zone and will continue to progress towards the lower end.

But we are also ramping up activity here at Winnebago Industries on both the business development front, but also in terms of identifying further organic investments that can accelerate our growth and profitability.

Stay tuned as we share more in future quarters about our intentions and developments.

And with that, we will wrap up our formal comments for the morning.

I would like to end, as we always do, with a genuine statement of thanks to our Winnebago Industries employees for their hard work during the quarter and for their continued commitment to providing our customers with high-quality products and services.

It is their efforts that make all the difference.

Thanks very much for your time this morning.

I wish all of you, and all of the Winnebago Industries team, a great start to spring.

For those of you in the Northeast, hang in there.

It won't snow forever.

I'll now turn the call back over to the operator to start the Q&A session.

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

On the tax rate, Bryan, what should we use as the effective all-in tax rate for fiscal 2019 and beyond?

For 2019 and beyond, we'll have a 21% statutory.

You can assume 3%, 4% state rate.

That's the unknown right now, Craig, as we work through, and I think every company works through, the impacts to the state rate.

But that would be the assumption I would guide you towards.

And then, Mike, in your repaired -- prepared remarks, you mentioned employees, the Foundation and some capital projects as potential uses for the windfall from tax reform.

What proportion of the windfall would you expect to allocate to shareholders?

And kind of on a related note, how does the decision to reinvest in the company in the way you described impact your 2020 margin plans, if at all?

And I'll probably have Bryan go into a few more of the details around the employee distribution and its percentage potentially of the tax reform benefit.

And I would say that we're not necessarily looking at the tax reform savings as something that will be, certainly, a headwind to meeting our 2020 objectives.

Certainly, all this continues to unfold.

And as you know, it's not the only development that's happening in the economic market as well, with certainly some of the things I referenced earlier around steel and aluminum tariffs and other potential pressures there.

So we believe this is just another factor in striving towards the four 2020 goals that we laid out.

And if you're referencing specifically the 10%-plus operating income goal that we announced last November at our Investor Day, we certainly are not hedging away from that.

And as we intentionally use the plus in that phrase, we will do everything we can to meet that and certainly exceed it.

But Bryan, you want to speak to some of the...

Yes, Craig, as it relates to impact to 2020 margins, those will be discretionary decisions that we would make at the appropriate time in the future.

I would say, at this stage, the impact to our OI margin would be inconsequential.

I guess the question is, should shareholders read anything into the fact that they were not mentioned among the groups that are going to benefit from the tax windfall?

No, you should not read anything into that.

There will certainly be a portion of the benefit that will flow to shareholders.

That was meant to be implied.

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

Just a couple quick ones from me.

First one, just, thank you, Mike, for the color on the production cadence, inventory.

I think that's really helpful information.

I guess it seems a little bit more of a cautious tone.

Have you seen anything with retail, perhaps, with any reference to the snowstorms coming, have you seen anything to maybe cause a little bit of a later start to the season?

I would say, certainly, any time 4 nor'easters hit the Northeast part of the country, that may have an impact on that particular part of the country.

I've talked to a few RV dealers in that area of the country whose lots are becoming a little bit more difficult to maneuver around.

And certainly, as they take in some inventory from OEMs to start the season, with the way that snow is piling up, they're trying to figure out how to manage that.

But that's more pragmatic and logistical for the dealers.

There's been a few retail shows across the country where weather has not been favorable.

The good news is that, as I mentioned in my comments, we are seeing very strong RV retail show traffic.

That is generally consistent across the country.

Now there are times where weather potentially plays an impact on the actual sales that happen at those retail shows.

But I would say, when you look at our own results, I mean, we're -- I certainly won't share much about what we're seeing here in March at the start of third quarter.

But we have been pleased with Winnebago Industries' results on both Grand Design and Winnebago through the first 2 months of the calendar year, January and February, on the retail side.

So I think we're all rooting in the north part of the country for the sun to come out and the snow to stop falling in certain places.

But we're not seeing anything that would mean that the customers are going away permanently.

If they don't buy at the levels that they might have bought last March, we believe that demand is still there for April or May or June.

Okay.

Yes, hopefully spring arrives soon.

Okay, then just a real quick question with respect to Grand Design.

So there's two parts to it.

Number one, if we look at the backlog, there's a little bit of deceleration.

But does that include the Transcend product?

Because we've heard very favorable things from the dealers.

And I was just curious if some of the Transcend product would be included in the backlog you reported this morning.

And secondly, there is some consolidation in this space.

And I think, generally speaking, some of the consolidators don't carry Grand Design.

Any -- could you just kind of give us a reminder of what happens when you have a Grand Design dealer that's acquired and maybe the parent company doesn't generally do business with Grand Design?

How does that shake out?

Are there opportunities for you to move to another point of distribution of the market if need be?

Sure.

I'll address your first question, obviously, first.

That being around the backlog for Grand Design.

We are very comfortable and pleased with the backlog for Grand Design.

And as we referenced in our comments, this business continues to grow at a very material pace.

They've introduced new products, really, in each of the last 2 or 3 years that have really hit the mark in the industry.

And all of those products, as they're introduced, had a little bit of a different cadence to them in terms of order generation, certainly shipment pace, and then the retail impact on the business.

And so your question, I think, was specific to the Transcend.

We are taking orders for the Transcend and have been since we showed the product in Louisville in November of 2017.

However, we are working with the dealers to make sure that the orders that they give us on the Transcend are reasonable in what we can fill over the course of the coming months.

The Transcend is being built on a new line in one of the new production facilities on the Grand Design campus.

That production really began in earnest in early January and is continuing to ramp-up to material production rates as we speak.

And so, if you were to survey many of the Grand Design dealers, they would tell you that they're not really -- they really haven't been able to get as many Transcends yet as they would have liked, because the customers are learning about it, and they are asking the dealers.

And certainly, they're acting, in terms of retail, on the units that they do have on their lot.

So we continue -- we will see Transcend contribute more to the backlog in the future and contribute, obviously, more to the shipment and retail results as well.

The other thing that perhaps I wasn't overly emphatic about in my comments were, Grand Design has gotten off to such a great start in its company's history that its backorder position really outpaced significantly its capacity or manufacturing capabilities.

And as you guys well know, there is a point where too much of a good thing can hurt you a bit.

And that backlog for Grand Design was certainly elevated because of strong demand, new products, pipeline fill.

But we have been struggling to obviously react to that with strong enough production rates.

We believe that this addition -- and if you remember, a couple of quarters ago, we referenced 40% more square footage being added to the Grand Design campus over time.

We believe that those manufacturing additions will certainly allow us to work the backlog down while we continue to add orders to the backlog in the future.

So it's a bit hard on Grand Design to do apples-to-apples on backlog still.

And that will probably normalize itself over the coming years.

Okay.

And what about the consolidation?

And if you have a dealer that's taken out?

Thank you for the reminder.

Our process for Grand Design, very candidly, is very similar to what we do with the other two businesses as well.

Whenever a dealer in the marketplace is acquired or has a new owner that presents itself, we look at that situation on a one-by-one basis and determine whether that new ownership group is aligned with what we want to build in the market.

Now there are certain state [circuits], which have specific franchise laws or some regulations which make that process a little bit different in some areas than it is in others.

But for Grand Design, we are very pleased with the dealer base we have.

And as potential dealers that carry Grand Design are consolidated, we review those on a case-by-case basis and determine whether the new company that acquired that dealer is somebody that we feel is a good fit for the Grand Design business model going forward.

And there are many great independent dealers in the RV Business that would love Grand Design, that do not have it.

And they are certainly folks that we'll look at in the future, if they acquire one of our dealers.

But again, case-by-case decision as that happens.

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

So, I mean, I guess, in terms of the Grand Design, I mean, it looks like your production has kind of been short of your backlog for some time.

So I assume with the production increases coming at Grand Design and potentially the wholly owned Towable business, you could have the potential to produce more than you currently have in the backlog at the end of the quarter.

Does that make sense?

Well, certainly our production capabilities are increasing on the Grand Design campus.

And as long as we have, obviously, a healthy backlog and the market conditions remain stable and hopefully growing, we'll continue to utilize more and more of the new capacity that we bring online.

So I don't want to get into specifics about how much we can make and what percentage of the backlog.

The backlog is literally a sort of a first-in-first-out list.

Dealers have placed orders, with obviously, the intention of receiving those.

And the Grand Design team is feverishly working to fill those orders as quickly as they can with high-quality product.

And so there is a pace to a manufacturing process that we try to stay within to make sure that our employees work in a safe, productive environment.

But yes, our capacity is increasing in that business.

And so long, again, as market conditions and our backlog warrant it, we hope to continue increasing manufacturing output to meet that demand.

Okay.

And then did you say what the growth was for Grand Design year-over-year in terms of revenue?

We're not calling out Grand Design specifically anymore.

But the Towable segment was 55%.

Okay.

In terms of -- I mean, can you maybe talk about in terms of the Winnebago Towables?

I would assume the growth rate would've been higher there just due to the fact that it's off a low number.

Does that make sense?

Yes, it's a much smaller piece of the Towable segment than Grand Design is.

But both businesses, combined together, are contributing very nicely to the growth rate.

Okay, okay.

And then lastly, just on the -- I mean, obviously the EBITDA, adjusted EBITDA for motorhome down again.

I think that was expected based on comps last quarter.

Can you just talk about longer term, certainly not this year, but maybe what your goal is for that business?

Can you kind of get it back to levels that it was in the past?

Do you still feel confident that you're maybe on the right track?

I know sometimes you can take a step forward, two steps back, and it's not a straight path, I guess, is what you've said.

But do you still feel confident that you can return that business to maybe prior margins?

Or what type of margins are the goal there on an EBITDA basis?

Yes, so Steve, that's a -- that's certainly a focus as, I believe, you can tell from our comments this morning and in previous quarters.

I hate to be overly simplistic, but we'll break the Motorized turnaround into two pieces.

One, facing the market.

Are we becoming more competitive in the marketplace with products that dealers and end customers like?

And can dealers make appropriate margin on the Winnebago-branded motorhomes that we're offering?

We are making good progress facing the market on the Motorized business.

Our product line is turning over effectively.

We're getting more efficient at introducing new products to the market.

Those products are more regularly being viewed as good products.

We believe we can do even better in the future with the sort of the feature combination and certainly the design elements, both interior and exterior.

But facing the market, we believe we're starting to see some traction.

And we don't want to get ahead of ourselves.

But we're working hard to rebuild the dealers' confidence in what we can do, but also ultimately then earn the right to get the end customers business.

The second half of the Motorized turnaround is certainly, as you mentioned, the profitability of the business.

And that has been something which, for me now having been at the company 26 months, has proven to be a little bit more of a headwind than I would've expected and certainly would've liked.

Now some of those are very intentional investments in order to upgrade and revamp our manufacturing facilities and our capacity on the Motorized side.

And some of those are intentional in terms of defending what has been eroding market share.

We've introduced products in the Class A Gas and Class C now here with our early third quarter unveiling of a new product, which are meant to attack that portion of the market that we weren't previously competitive in.

But the team is intently working on driving the cost structure of the overall business, including materials and labor, into a stronger position.

And your question about what is the margin potential of the business?

We have been very clear that -- we have expectations for, over time, low to mid-double-digit margin -- gross margin potential in this business.

And that progress has been slower than we would've liked.

The gap between our first quarter profitability, Q1 '18 versus Q1 '17, that gap is wider than what it is now between Q2 '18 versus Q2 '17, meaning we've narrowed the gap a little bit year-over-year.

And we will look to potentially increase the gross margin, hopefully, consistently in future quarters.

So lots of hard work being put into that, and we recognize that has to happen to have all three flywheels of our business model spinning.

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

Just looking at the growth in the Towable business, again, it was all organic this quarter.

And just, I know this isn't an exact science, but if you look at your growth and, generally speaking, Grand Design's growth at retail, which has been at that mid-50% range, so it pretty much assumes -- I know there's been some buildup of product, but obviously you have some really good pull-through on the other side of that.

With that said, heading into the back half of the year, where things stand right now with your backlog, and just where your dealer inventories are, do you believe you're still in that position to mostly have that mirror what we're seeing at retail versus wholesale?

As I mentioned late in the prepared comments, our turns on the Grand Design business in the field are steady, which means that as things are being retailed, inventory is being replenished.

And the aging inventory at Grand Design is, very honestly, in wonderful shape.

It's the best of our 3 businesses and not presenting any headwinds really to us at all on that particular brand.

So we continue to be optimistic about Grand Design's growth prospects in the future.

The law of numbers starts to kick in a little bit as that business begins to get a little bit or a lot bigger, in terms of the percentage comps that you can put on larger numbers.

But again, we're very early on, as an example, in the Transcend, in our entrance into the introductory travel trailer segment, or as the industry insiders will call it, stick-and-tin.

And so we have really barely any share at all in the stick-and-tin segment.

And Grand Design is now our first entrée into that segment.

And so, in addition to the other products in their line and some of the additions and wrinkles they've been adding there, we continue to be optimistic, Scott, about what they can do.

And as long as the turns stay in good shape, that's, for us, a good sign.

And I know people look at backlog and they look at inventory.

We look at turns very intently in terms of whether they are increasing or decreasing or staying stable.

And for a business like Grand Design that continues to grow tremendously, we're pleased with where -- how they're managing their business and their performance in the market.

So basically, echoing the comments in the press release and what you said, you're comfortable with your Grand Design inventory right now, where it stands?

We are comfortable with our Grand Design inventory.

We are taking dealer lot share.

We're introducing new products.

The aging percentage of that inventory is very low.

And more and more dealers are shifting more business to Grand Design.

And so, again, Grand Design is -- has mid-single-digit share of the Towable segment.

And so there's a lot of runway there, which means the raw inventory numbers, gross-wise, should grow over time as we take share so long as the turns stay steady or increase.

And again, we watch both those to make sure that inventory is healthy.

And just going back to the backlog on a year-over-year basis.

Again, you said it last year, it sounds like you're taking full orders for a couple of new products.

This year, I guess, you are taking orders but not really as much as you probably could've because you don't want to just have units that you can't deliver if you don't have the production capability for it.

So how do we -- good way to look at the backlog, could've been a lot higher, if you really -- if you were to fulfill all of the Transcend orders that are out there?

Yes, I would just say that the Grand Design team has very much been managing the conversations with the dealers about the Transcend and the production output capabilities.

And I think dealers are placing orders that are in accordance with what they believe the production output is.

And so as production increases on the Transcend, and knock on wood, the product continues to retail as it has been early on, at strong levels, we believe we'll continue to see the order backlog increase on Transcend.

It's material today.

But again, it's a -- it's still very early.

And probably a year ago, we were probably putting our foot on the pedal a little bit more with the Imagine, and I think, the Reflection product that had been -- those two had been sort of recently introduced in the year prior.

And so timing is obviously a little bit different in terms of the Transcend introduction.

But again, we're not seeing any concerning signs in terms of market acceptance of the Transcend as compared against the other products Grand Design has introduced in its lifetime.

And just going to the Outlook on the Class C side, you talked about it earlier this month, so -- is when you revealed it.

It sounds like it's been well received.

And maybe just talk about -- I mean, this was not in your Motorized backlog, of course, at the end of February, correct?

No, we unveiled that at the National Dealer Meeting in early March in San Diego.

We also unveiled, and I did not mention this in my comments, a new Travato product with a lithium battery pack, which also was received very favorably by our dealers.

And we took orders on both of those products in addition to some other products that we showed.

But those were kind of the 2 primary new motorized offerings.

And so the orders we took on both the Class C Outlook and the Travato, and that we're continuing to take, would not have shown up in our end-of-Q2 backlog.

So that narrative and conversation with the dealers is really just beginning on both of those products.

Got it.

And then just one quick last one.

I know it's way early to talk about tariffs.

But maybe just give us your initial take on that, on how you would handle that, whether it would be through price increases.

And maybe, if you could just talk about, I don't know if you have this figure handy, but steel and aluminum, how material of a piece of your cost of goods sold?

And that's all from me.

Scott, this is Bryan.

The impact of the tariffs and how that will flow through into the domestic marketplace here is still a big unknown, okay?

So we have gone through a process of analyzing our direct purchases, which are entirely domestic.

Our direct purchases of steel and aluminum, that is, which are domestic.

Our component parts, we, likewise, have analyzed what percentage of our cost of goods are exposed through the component parts.

And so we've done all the work.

Now it remains to be seen where the market settles on steel and aluminum here.

And I think it's a little bit early to tell.

And of course, our initial analysis assumed that the administration would stick to the no exemptions policy.

And that is clearly loosening now with Canada and, I think, Europe now also receiving an exemption.

So a lot remains to play out yet in the marketplace.

How we would handle it?

We would certainly first work with our vendors to understand how we could offset any potential increases from the marketplace through cost-reduction initiatives that we would jointly pursue.

And then we would also pursue any pricing necessary to offset inflationary pressures around aluminum and steel in the marketplace.

So that's how we are approaching it.

But it's still early, it seems, in terms of seeing how this will play out in the market.

Our next question comes from the line of Mike Baudendistel of Stifel.

I just wanted to ask you about the Winnebago-branded Towable expansion projects and some of these other projects to expand the manufacturing capacity.

Could you frame that for us in terms of how much you're increasing the capacity for unit output or sort of potential revenue?

Yes, so, Mike, thanks for the question.

This is Mike.

I -- we're not sharing specific unit or even revenue potential impact from the capacity expansion plans.

But we referenced with Grand Design, when we made the announcement several quarters ago, that we were adding about 40% manufacturing space to the Grand Design business.

Now, not all of that was relative to assembly.

There was some increased lamination capacity that was added and some other room that's needed for material storage and the like.

The Winnebago Towables expansion was approved by our board a couple of quarters ago.

We made that announcement then.

We've been working with, certainly, our construction firm partners and with state And local officials to be prepared to kick off that project.

The land that we intend to look at for that expansion has been recently closed on, and we're nearing the point where we'll be breaking ground and/or, at a minimum, preparing a site for that project in the future.

And so if you were to go to the Winnebago Towables campus today, it's a relatively small campus versus its size in the industry.

And it literally has 2 buildings that are manufacturing product in it.

We will begin the expansion project by adding a third building.

And so the math isn't probably exactly from 2 to 3 buildings in terms of our output, but it gives you some relative idea of the proportion of an increase that's happening there.

And we have the capability with the land we've acquired to add even more buildings on that site if we need to.

So that business, Winnebago Towables, is growing, albeit at smaller volumes.

It's growing at a very similar rate to the Grand Design business.

It's smaller.

It has a more compact product line, very much focuses on sort of a different product concept in many ways.

But we are very much focused, equally as focused, on growing our Winnebago Towables business as we are on Grand Design.

And we have a lot of work to do in the product line-up there.

We're very light on fifth wheels, as an example.

Very light on toy haulers.

We've not entered the stick-and-tin segment with the Winnebago-branded Towables.

And so the manufacturing space that we'll be adding allows us to not only grow the current product line, but potentially consider expansion into these other segments.

Great, that's helpful detail.

Also, I'd just ask you as a follow-up on the input cost.

It sounds like, from your comments, that the main sort of pricing actions to pass those input costs on to the dealers would come in the fall when the new model years rollover.

And -- am I interpreting that comment right?

And are there opportunities in the interim to capture -- to pass those costs on sooner than that?

So there's a difference between model year and fiscal year.

The model year changes in the RV industry actually tend to happen kind of more in the early spring part of the business cycle.

And so when I say model-year changes, we're actually right in the midst of some model-year changes from 2018 to 2019 across our businesses.

And we have tended to tie many of our price increases to model-year changes.

And so some price changes were embedded in performance year-to-date.

But there are more price adjustments to come as the 3 businesses introduce 2019 model year.

And we do not use a straight-line pricing strategy across the board.

We price to market.

Each business unit leader has got the autonomy and the empowerment to price the products to the market, but certainly respectful of some of the price pressures or cost pressures that they're seeing on the commodity or on the supplier side.

And the other comment I'll just make is that our 3 businesses have varying degrees of effectiveness at driving cost out.

And as I mentioned, our Motorized business can do a lot better job in the future in driving cost out of the products to help offset some of the potential inflationary pressure that we may see in the future.

And that's just part of the learning curve here, and the journey that we're on, is to have a list of productivity improvements and cost-out improvements without impacting quality that allow us to offset that.

We do a lot better job of that in our Towables businesses today.

And that's in part why you're seeing the Towables business continue to demonstrate really good profitability.

Great.

That's helpful detail.

I'll just sneak one last one.

You gave some good detail on your thoughts on your inventories.

If you have any thoughts on the overall industry inventory levels?

Has there been any stuffing the channels by competitors in order to capture share of the dealers' lots and anything like that?

Our visibility to industry inventory levels comes from a variety of sources.

Some of the inventory financing partners have better insight into that.

Sometimes even some of the bigger suppliers can give us some insight into that.

And very candidly, sometimes we read the analyst reports to get some of that insight a little bit as well.

I would tell you that, again, we are a distant #3 in terms of size of this industry.

And so as you're hearing us say today, we're actually comfortable with the inventory positions in the field on our 3 businesses.

And so if there is any pressure in the field on inventory levels, it's not coming from Winnebago Industries in the eyes of the dealers.

And so, do we watch other lines on the lots that we have visibility to with the dealers that we work with?

Sure.

And certainly, my comments in my prepared remarks about OEM manufacturing pace are in some ways related to your question in that I think as an industry, we just -- with all this capacity coming online, all of us just need to be continually mindful that no matter what the growth pace is, if it's similar to the past several years, or in fact, if it does slow down, we just need to be very mindful that we've got to manufacture to what the market is doing.

And so that's -- we're having that conversation very much here at our company.

Let's not get ahead of the market.

Let's run the business smartly.

Let's optimize everything we can.

But we're not going to driver our turns down in order to take retail share.

That's not our strategy.

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

Just questions on the Motorized side.

From a profitability standpoint, you said margins were down, I guess, over 300 basis points year-over-year, right around that.

Can you give us a sense of how much of that is going to be mix versus input cost versus some of the investments you're making in some of the ramp-up costs?

I think, last quarter, you said about 50% of the year-over-year decline was investments.

Could you give us a sense of maybe what that looked like in the second quarter?

Yes, and I can give you -- this is Bryan, Michael.

I don't think we'll provide a specific breakdown of -- in percentage point terms.

I'll tell you in terms of how I would rank them and the impact they've had.

I would say it starts with investments to increase capacity, the onboarding of the West Coast facility, the changeover of the lines in Forest City that Mike alluded to.

I think the material pressures I would characterize as second, and I would characterize the business mix as third.

Okay.

And just to help us understand a little bit better.

On the investment in the capacity and the line changeover, I guess, buckets that you talked about.

When should we start to see that impact ease?

When we start to see it ease?

Is that what you said?

Yes.

We're not committing to a specific time frame, Michael.

As Mike alluded to, this is a longer-term transformational journey that we're working towards.

We believe that we're doing all the right things during Q2.

I would say that's true in Q2 as well.

And so we're not making a long-term commitment or a near-term commitment to it.

What we are committing to is that in the long term, we believe we're doing all the right things to turn this business around and that the transformation journey that we're on is the right path.

And then second question on Motorized.

I think you said during the quarter, you had some challenges from the sourcing perspective for some of the new products you introduced in the fall of '17.

Could you give us a sense of maybe when some of those model mix or some of the sourcing issues actually clear out?

Yes, this is Mike.

I'll speak to that a little bit.

I'll give you an example that's probably a sort of a first-world problem.

We introduced -- the Revel has been just a home run with end customers in the market.

It is our Class B 4X4 sort of off-road RV, and it has just hit just a huge vein in the sense of excitement around especially younger RV customers and explorers and outdoor enthusiasts about this product.

In fact, it actually hits the mark in terms of where customers used to buy their own Class B van and outfit it themselves, and now the Revel is essentially what they were trying to build themselves in their own garage.

That product, when we introduced it at Open House in fall of 2017, just tremendously generated excitement across dealers and with end customers.

We have seen millions of impressions and hits on social media.

And subsequently, the demand from the dealer base has exceeded some of our initial forecasts.

And we're working with our suppliers on the Revel to try to keep up.

And so that's an example where component availability is generated from stronger demand than we had anticipated.

At the same time, we have a few products in which some of our suppliers, and at times working with Winnebago where we fallen down together, and it's inhibited a few of the products from getting out in as timely a manner as we'd like.

So it's not epidemic.

It's really sort of spot-by-spot.

But I just point to it in the sense that it is just something we continue to battle in the Motorized business.

And as we mature and get better, our forecasts will get more accurate and we'll have better relationships even with most of our suppliers and more timely delivery.

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

Just 2 questions from me.

First is on consumer shopping behavior.

Have you ever seen any data on customers who perhaps were in the market for an RV and ended up not buying an RV, or ended up not buying Winnebago product, either way?

What did they end up doing?

Did they end up either buying a different RV?

Not buying an RV at all?

Or perhaps buying, say, an off-road light vehicle, like a Jeep or a pickup truck?

I would say we have more visibility into RV customers that start their search with Winnebago and then buy something else.

In fact, we -- the term we use here is close rate for that.

And in fact, I was just looking at some data over the weekend, published by actually -- in the RVDA publication, about Winnebago being the most searched for brand in Class A and Class C motorhomes.

We literally are the most searched for online brand in Class A and Class C motorhomes.

Last I checked, we did not have market-leading share in either of those segments, which means our close rate is not as strong as we would like it to be.

So we then dive into, obviously, those dealerships that do have Winnebago, and what's our share in those dealerships compared to their other lines, and we do, do some analysis around that.

It is much harder to track, David, a customer that leaves the shopping process and goes and buys something else in the consumer discretionary market, could be an automobile, could be a boat, could be an ATV, anything else that they might want to experience in the outdoors.

So that is harder.

We do believe RVs have been competing very effectively for consumer discretionary dollars over the past several years.

If you look at the average selling price of RVs compared to that subsequently of the marine market, the RV industry has been very stable, and in fact, I think been able to compete very effectively if a customer has a choice there.

So -- but no, we don't necessarily track customers who leave the RV sales process in their -- in its entirety.

Okay, that's helpful.

And then, Mike, you also said you're personally not very patient on the pace of the turnaround effort.

And what's frustrating you the most right now?

Well, I worry, David, about the things we can control and the things we can't.

And so we're -- as I said before and at the end of my comments, we're here to build a high-performance ownership culture, certainly one that cares for employees so that they care for our customers.

The majority of my frustration as a leader is around the things that we can control and that we can do better.

And listen, the effort in the Motorized business is superlative.

We think we have very good leaders in different roles, but we continue to be inefficient in cases of removing constraints or barriers in the business or creating a few of our own headwinds.

And so that's probably where I'd tell you that the pace is a little bit frustrating, but yet, we're really turning a 60-year-old culture and trying to do it in a way which is respectful, but also ultimately convinces our team that we're going to build something that all want to be a part of and all can be a part of.

And I would say even the tax reform distribution announcement this morning to our employees signals that we're committed to the culture, both in terms of the cash benefit but also making each of our employees even larger owners with today's announcement as well.

So -- but thanks for the question.

We're working on it.

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

Fred Wightman on for Greg.

I think in the prepared remarks, you highlighted that you were working down sales support levels in the channel.

Can you just talk about where those are today versus peers in the industry?

And sort of where you think that needs to go in the future?

Yes, thanks for the question.

It's an important topic and, I think, in terms of the health of our business.

We use the term sales allowance to signify at times the sales support you need to support a product moving through the pipeline, first into a dealer lot and on occasion into an end customer's hands.

And this industry, not unlike other durable goods industries, at times has some habits where OEMs incentivize dealers certainly to take product at times in which inventory needs to be moved.

And I would argue that the healthier our Motorized business becomes and the more pull we have with end customers and the more profitably that our dealers make with our Winnebago brand of motorhomes, the less we'll need to offer potential discounts in order to compete for space on their lots.

The good news is, 6 months year-to-date in the Motorized business, as a percentage of sales, we're supporting the sales line with less sales allowance dollars, which means that the product is getting better, dealers are actually ordering it genuinely, as you can see in the backlog increase of 42%.

And it's something that we just want to continue to have a healthy balance in the way that we support dealers with moving product, but we're not looking to -- we are looking to mitigate the temptation to incentivize dealers to take product that they don't always potentially ask for at that particular time.

And we're making some progress on that, but it will come because the product itself is better and more demanded by the end customer and the dealer, and we're starting to get there.

Okay, great.

And then from an end-consumer perspective, if we look at sort of the 2 big forces this year, maybe some benefit from the tax bill, offset by rising interest rates.

Can you just sort of talk about how you're thinking about those 2 factors going forward for the rest of the fiscal year?

Well, certainly, we think there'll be a positive from the tax reform legislation.

And it is starting to slowly trickle into the wallets of end customers through their weekly -- or twice-a-month paychecks.

At the same time, there'll be more benefit, I think, from that as folks in the future receive those checks regularly, they file their tax returns in the future.

So we think that will be a positive, certainly.

In terms of the interest rates, and I certainly understand there may be some news yet today, we don't believe that the interest rate ascension that could happen here in the next year will tremendously lower RV demand, because we believe interest rates are still historically affordable, and that the monthly payments that sometimes are offered by the financing companies on sound financing deals, combined with those interest rates, are still very much affordable.

So while we believe that it's -- would we prefer to see interest rates go up?

Probably not for our business, but we're not anticipating that what we're hearing could happen is going to have a significant negative effect.

We believe that there are enough other secular tailwinds.

And again as I mentioned, traffic at RV retail shows has mostly been very good across the country.

And so we believe people are still very interested in the lifestyle.

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

Yes, I guess, sorry for the follow-up, I'm a late call.

But could you just remind us what CapEx would be in 2018 and fiscal '19?

Just directionally maybe?

Yes, Steve, CapEx, we're expecting right around $35 million.

And 2019 would come down off of that following the big capacity expansions in both Grand Design and the initial steps we're taking in the Winnebago-branded Towables business.

And then we also have the ERP.

That should be ramping down in 2019 from 2018.

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

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

Great.

Thanks, everyone, for joining our call today.

We certainly appreciate your time and look forward to speaking with many of you throughout the quarter.

Thank you, and have a good day.

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.