Winnebago Industries Inc (WGO) 2019 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the First Quarter 2019 Winnebago's Earnings Conference Call.

(Operator Instructions) As a reminder, this call will be recorded.

I would now like to introduce your host for today's conference, Mr. Steve Stuber, Director of Financial Planning and Analysis and Investor Relations.

You may begin.

Good morning, everyone, and thank you for joining us today to discuss our first quarter earnings results.

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

This call is being broadcast live on our website at investor.wgo.net and a replay of the call will be available on our website later today.

The news release with our first quarter 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 in 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, 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 today's call.

We are sincerely grateful for your time and for your interest in Winnebago Industries.

We will begin this morning's discussion with an overview of our fiscal year 2019 first quarter results and a brief perspective on the balance of the year.

I'll then turn the call over to our Chief Financial Officer, Bryan Hughes, who will provide more detail on our financial results.

I will then return with closing comments.

And as always, we will end this morning's call with a Q&A session.

As fiscal year 2019 kicked off in late August of this past summer, we had just completed a successful fiscal 2018 year, a year in which Winnebago Industries surpassed $2 billion of net revenues for the first time in company history.

North American RV market share had risen to approximately 8.5%.

And we completed the acquisition of Chris-Craft, one of the world's finest luxury boat brands, in an intentional effort to diversify to new outdoor lifestyle arenas.

It was a good year.

We now look to 2019 in this fiscal year for more of the same: sales results that surpass those of the industries we compete in; a focus on driving higher levels of profitability and asset utilization; and an appetite to grow in new ways that position Winnebago Industries and its brands for sustained future success.

We are pleased with the results from the first quarter of this new 2019 year.

Consolidated first quarter revenues were up almost 10% for the period, with top line growth being driven by the popularity of our products across the Towable segment.

We are pleased that Winnebago Industries' overall revenues continue to grow organically and at a healthy pace, at a time when the RV industry is working to normalize its overall field inventory levels in relation to a more moderate retail pace.

In addition, we have made material progress in increasing our profitability.

Consolidated gross profit margin increased 40 basis points in the quarter, driven by favorable business mix due to continued growth in our Towable segment and improved margins in our motorized segment.

Given the solid top line growth, coupled with margin expansion and improved operational discipline, cash flows remain strong, growing 84% over last year, and we were able to reduce debt by $38 million during the quarter.

Now turning to the segments in more detail.

On the Towable side, revenues for the quarter were up 13% over fiscal 2018, leading to continued market share gains for both our Grand Design branded and Winnebago-branded RV businesses.

Our ability to outpace the industry in terms of unit shipment and retail growth is clear affirmation of the robust appeal of both our Towables brands across a broad customer base.

Adjusted EBITDA margins did decrease 240 basis points though in the Towable segment, largely reflecting the strong comparable period in the year prior, an increasingly competitive market and continued cost input pressures.

Towables' backlog levels remained extremely healthy at over 9,000 units for the quarter but declined 3.9% in dollars versus the prior year, reflecting unusually high backlog levels last year in Q1 and the benefits of the increased capacity we brought online during the course of calendar year 2018.

We are very comfortable that our current Towables' backlog is in line with internal growth projections we have for the remainder of the fiscal 2019 year.

Overall, we continue to be exceptionally confident in the growing strength of our dual-branded Towables lineup.

This strategy was on full display at a recent open house event where we introduced our completely revamped Winnebago-branded SPYDER toy hauler and the Micro Minnie lightweight fifth wheel, which have unique appeal with smaller truck owners.

Additionally, on the Grand Design business, we launched a Momentum-branded toy hauler in a travel trailer format and introduced the popular Solitude fifth wheel in a smaller S-Class.

Since the unveiling of these new products, we've seen strong early order momentum and believe they will contribute to continued growth going forward.

Moving now to the Motorized segment.

We have continued to advance our efforts to both strengthen our Motorized product line up and improve profitability within the business.

While revenues were down modestly, 3.6% versus the prior year, we believe the wholesale sales pace actually exceeded that of the industry in the Q1 period.

We also continued our progress to expand gross margins as efforts to implement operational improvements, manage cost input pressures and the favorable mix related to a strong Class B quarter all factored to yield strong results.

As a result, adjusted EBITDA margins for the Motorized segment increased 400 basis points over the prior year.

Restoring both sales and profitability momentum in the Motorized business on a consistent basis remains a top priority for us, and we continue to dedicate a considerable amount of energy and resources to this effort.

Talent, products, systems and processes are all being worked on.

Key to this effort in the future will be continued new product development that improves our standing with the motorized dealer base and produces stronger retail results and turns for our channel partners.

Within the quarter, we successfully unveiled at the open house event our new Class C Vita and Porto diesel models on the Mercedes Sprinter chassis as well as our new Adventurer Class A gas model.

These are important steps but not the only ones that we will take in fiscal year 2019 to stabilize our Class A and Class C categories.

The Motorized backlog declined 24% in dollars from the prior year.

3 elements are to be considered in the comparison versus a year ago.

First, fall of 2017 saw a positive but abnormally high number of new products introduced in the Motorhome business, particularly the product brands Intent, Revel and Horizon.

We did not have the same level of new product orders this fall.

Second, rental orders into the Motorhome business this first quarter are a bit delayed versus a year ago due to retail channel decisions, but we are pleased with the incremental share progress our Motorized team is making in this channel.

And third, the market conditions for Motorhome shipments into the channel are indeed tougher than a year ago, particularly in light of strong, competitive brand destocking behavior by many of our dealers.

Lastly, we are seeing the benefit of a full quarter of Chris-Craft marine sales within our financials.

We are pleased with the integration of this brand into our portfolio of outdoor lifestyle products.

The Chris-Craft team has had a tremendous summer and fall, especially touting the introduction of 2 new models: the 28 and 35 Launch GT boats.

Both have received tremendous reviews from the dealer community and the boating industry trade press.

Chris-Craft sales in the first quarter were strongly positive in shipments and retail versus the same period a year ago and they are performing on pace with the financial plan we modeled for the first full fiscal year within Winnebago Industries.

With that overview, I will now turn the call to Bryan Hughes to review our fiscal 2019 first quarter financials in more detail.

Bryan?

Thanks, Mike, and good morning, everyone.

First quarter consolidated revenues were $494 million, an increase of 10% compared to $450 million for the fiscal 2018 period, driven primarily by another strong quarter of strong organic growth from the Towable segment and further enhanced by the acquisition of Chris-Craft.

Gross profit was $71 million, an increase of 13% compared to $63 million for the fiscal 2018 period.

Gross profit margin increased 40 basis points in the quarter, driven by favorable business mix due to continued growth in our Towable segment and improved margins in our motorized segment, courtesy of pricing that has been implemented over the past year and also through operational improvements.

Selling, general and administrative expenses increased 21%, reflecting ongoing investment in talent as we build our capabilities to effectively operate our growing portfolio of outdoor lifestyle businesses and introduce best-in-class functional processes.

We also continue to make strategic investments to further our profitable growth and appropriately resource the transformational journey that we are on.

And in the case of first quarter, we undertook a couple of strategic initiatives whereby we engaged outside professional services firms to supplement our internal capabilities, the cost of which were into the 7 figures.

We are pleased with their progress, and we feel confident in the strategic merits of each of these projects.

Even after including these incremental investments, first quarter operating income was $33 million, an increase of 5% compared to $32 million in the first quarter of last year.

Net income was $22 million, an increase of 23%.

And earnings per diluted share were $0.70 per share, an increase of 23% over the same period last year.

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

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

Consolidated adjusted EBITDA was $39 million for the quarter compared to $35 million last year, an increase of 9%.

Now turning to the individual segments and starting with the Towable segment, revenues for the first quarter were $293 million, up 13% year-over-year, driven by continued growth across the Grand Design RV portfolio.

Segment adjusted EBITDA for the first quarter was $31 million, down 8% from the prior year and adjusted EBITDA margins decreased 240 basis points, reflecting continued cost input pressures in a highly competitive market from a discounting perspective.

These cost input pressures have not yet been fully offset by further pricing increases, which are anticipated in the coming quarters.

Turning now to the Motorized segment.

Motorized revenues were $181 million for the quarter, down 4% versus last year.

While we continue to experience growth and market share gains in our Class B lineup, driven by the success of the Revel and Travato product line up, this growth was more than offset by declines in our Class A and Class C products, driven primarily by industry trends in these 2 classes and also comparing against the pipeline fill we had last year on the launch of the Class A Gas Intent product.

Segment adjusted EBITDA was $12 million for the first quarter, up 144% year-over-year.

Adjusted EBITDA margin increased by 400 basis points, primarily driven by the success of the Class B products, operational improvements in both Northern Iowa and West Coast facilities as well as cost input pressures being mitigated by fiscal 2018 price increases.

Turning to our balance sheet.

As of the end of the first quarter, the company had outstanding debt of $253 million, comprised of $260 million of debt, net of debt issuance cost of $7 million.

Working capital was $144 million.

Our current net debt to adjusted EBITDA ratio was 1.4x, which is once again within our targeted leverage ratio range of 0.9 to 1.5x.

Cash flow from operations was $54 million for the quarter, up $25 million from last year, driven by strong growth in net income and favorable changes in our working capital.

The combined strength of our balance sheet and cash flow provides us tremendous flexibility as we continue to invest in the business and execute our strategic transformation initiatives.

The effective income tax rate for the first quarter was 23.3% compared to 32.3% for the same period in fiscal 2018.

The favorable decrease in rate of 900 basis points is driven by the impact of the Tax Cuts and Jobs Act.

Finally, our board of directors approved the quarterly cash dividend of $0.11 per share, payable on January 23, 2019, to common stockholders of record at the close of business on January 9, 2019.

This increases Winnebago's annualized dividend rate to $0.44 per share and represents an increase of 10% over the previous annual dividend of $0.40 per share.

We believe this to be a meaningful increase that demonstrates our confidence in both current results and future growth opportunities.

That concludes my review of our quarterly financials.

And with that, I will now turn the call back to Mike to provide some closing comments.

Mike?

Thanks, Bryan.

As we have stated several times this morning, we are pleased with the positive start to our fiscal year 2019.

Our teams are working extremely hard to ensure that we deliver high quality, fast-turning, profitable products in a responsible manner to our channel partners.

Our RV and marine dealers trust our company's commitment to building reliable and durable products, as demonstrated by our low and stable warranty rates and our industry-leading legacy of aftermarket parts and service support.

This focus on quality, service and innovation continues to resonate as a differentiator within our markets.

It goes without saying that these are dynamic times within our business, internally and externally.

First, some comments on our continued internal transformation.

In January of 2019, it will have been 3 years since I had the privilege to join this storied organization and contribute to our journey from good to great.

In short order, we, as a complete Winnebago Industries team, have created an energizing vision around becoming a trusted outdoor lifestyle solutions leader, strengthened our core RV business, initiated a more diversified portfolio of revenue streams, made positive progress on cultural and operational improvement initiatives and delivered consistently stronger financial results, which reflect a healthy and more resilient company.

We highly value the assets that are our people, our brands and our strategic external partnerships.

We remain committed to reaching the long-range goals laid out in our November 2017 Investor Day presentation, even as some of the market headwinds that are blowing make a few of those goals a little bit more difficult.

Regardless, we will tack against the winds to find a net positive path to achieving our potential and delivering value to our shareholders.

We now have a more diversified business platform to grow from than ever before with active RV, marine and specialty vehicle operations.

From an opportunity standpoint, we have significant share expansion potential in each of those global markets in the next 5 to 10 years.

And we remain on the search for premium companies with strong brands that deliver on the product and service promises they make.

Many of you are understandably wondering about our view on the state of the overall economy, the North American RV industry and its prospects in the next year or 2 and the potential impact of those 2 subjects on our business.

I will address each of those now.

It is truly a more noisy and mixed macroeconomic environment.

There remain, however, still many positive signs about further sustained economic growth.

Fuel and oil prices remain extremely reasonable, which is a strong positive for our businesses.

Consumer confidence, while settling a bit, remains actually quite stable in amidst of gloomy headlines.

Inventory and retail finance companies are rational and are not abnormally constraining credit availability nor offering risky financing packages to dealers or end customers.

Our customers appear to still be spending money on holiday presents, enjoying experiences at restaurants with their families and friends and investing their valuable discretionary time in the outdoors, creating and collecting outdoor experiences.

However, we also recognize that there are legitimate macroeconomic headwinds.

The impact of tariffs and material cost increases are real for most durable good businesses and have resulted in higher prices at retail on RVs and boats year-over-year.

The recent increases of the federal funds rate have gained incredible attention and slightly impacted the monthly cost of financing for many end customers.

The volatility of the equities market and the slowing, however temporary, of the growing wealth effect in the U.S. have made some consumers more cautious in general about near-term discretionary purchases.

And we are still dealing with the uncertainty of the past midterm election results in the U.S. and our country's ability to create constructive compromise and policy both domestically and globally going forward.

Net-net, we still have hope in the ability of the North American economies to drive positive GDP growth in the next 12 months, but recognize that this macroeconomic environment is much choppier than in the past several years.

While sentiment in the broader RV market has been somewhat skittish lately, we remain optimistic about the long-term retail prospects for the RV industry.

In the short term, concerns about elevated levels of dealer inventories appear to be lessening with each passing month.

We have been very clear in our previous statements that the dealer inventories of Winnebago Industries' respective RV segments have remained in the comfort zones of turns, dollars and aging units that we monitor carefully.

Have we been impacted a bit by the overstocking of other RV brands at dealerships?

Yes, but our teams have been appropriately working with many of those dealers to ensure that we are a good partner and deliver high-quality products when the dealers are ready.

We are also aware of the RV Industry Association's latest wholesale shipment forecast for calendar year 2019 and think their upside/downside range is reasonable.

The real question is where the industry retail number will stabilize in the spring of 2019.

Flat retail for the whole of the calendar year 2019 is a good aspirational target for the industry, but we also admit that due to the volatility of the external environment, there could be a margin of error that is either slightly positive to low single-digit negative.

A reminder that on a trailing 3, 6 and 12-month basis, Winnebago Industries' consolidated RV retail has been running 15 to 20 points higher than the industry results.

It will be a challenge to sustain that spread into the future, but we are confident we will continue to perform at an accretive retail pace versus the industry pace.

What is important for our shareholders to know is that we at Winnebago Industries are extremely focused internally on managing what we can control: that is, our production rates and our highly variable cost structure.

We also won't forgo the opportunity or even obligation to smartly invest or pursue what we deem to be strongly strategic, long-term growth opportunities, but we will manage the core organic businesses very intentionally and carefully during these uncertain times.

We are not projecting an RV industry shipment regression in calendar year 2019 that comes anywhere close to the historical RV downturn averages over the past 40 or 50 years.

In fact, as our Q1 sales and results demonstrated, we at Winnebago are still focused on driving accretive growth to the industry in sales and EPS for as long as market conditions allow.

Looking ahead to the balance of fiscal year 2019, Winnebago Industries is in good shape to continue outpacing the RV and Marine industry in terms of top line sales at both the wholesale and retail levels and drive improving profit performance from a yield standpoint.

We think our track record of doing what we said we will do in the last 3 years has improved significantly, and we are committed to be a high quality, well-managed company that investors can place their trust in.

With that, I'll wrap up our comments for this morning.

We would like to end by thanking all of our Winnebago Industries' employees for their hard work during the quarter and for their continued dedication to providing our customers with high-quality products and services.

And we wish all of our employees, channel partners, strategic external partners and all of you on the call a happy holidays and a safe holiday season.

Thanks very much for your time today.

I will now turn the line back over to the operator to begin the question-and-answer session.

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

I wanted to start, Bryan, with a question for you.

I believe you mentioned discounting in the -- in your prepared remarks.

It's my impression that Grand Design does not offer discounts.

Could you just clarify those remarks for us?

Yes, that's right, Craig.

The discounting that we saw in the quarter was more focused on the Winnebago-branded Towables business.

Grand Design by virtue of the strength of that brand, the strength of their momentum, does not find themselves in the same situation as our evolving Winnebago-branded business.

And so those comments were more directed or entirely directed to our Winnebago-branded Towables business.

Thanks.

And another detail question on the rental market.

I understand that it impacted results here.

Could you help us understand the impact it had on units at the wholesale and retail level during the quarter?

And whether you expect to get all of that back in future periods?

Yes.

Our current discussions with the rental companies are still evolving, Craig.

We feel that they're going in the right direction or a positive direction just from an overall market share standpoint, but we did have a timing difference in terms of orders taken in Q1 this year versus where we were at last year.

So can't quantify it specifically or choosing not to just for competitive reasons obviously.

But we feel like we're heading in the right direction there.

Thanks.

And then, Mike, finally, I had a question on capital allocation.

I believe there is $66 million remaining on the share repurchase authorization, so if my math works, you could take that to 0 and still be below 2x on a debt-to-EBITDA ratio.

What's the board's thinking around the balance sheet and the ability to retire shares relative to other investment options you may have?

I mean, the stock really hasn't been this cheap in a while.

Yes.

Good morning, Craig.

Thanks for the question, and I'll offer the opportunity to Bryan to weigh in here too potentially after my comments.

The board has -- we are in constant discussions with the board and specifically the finance committee that we created within the board structure a couple of years ago now to discuss all of our capital allocation options.

And as we first shared at our Investor Day in the fall of 2017 -- and we've stayed pretty disciplined to both the priority but also sort of leverage ratio range in terms of our balance sheet and thinking about how we allocate capital.

And we certainly have placed a priority on organic and/or inorganic growth strategies first and certainly are also mindful of the debt repayments of the existing debt we have on the balance sheet as another priority, always maintaining an eye on liquidity for the company, especially in volatile times.

And that's probably a more relevant topic here, given some of the increasing volatility of the RV industry.

Certainly, other decisions in terms of the use of capital like dividend payments to our shareholders and repurchasing stock are constantly weighed and assessed by Bryan and his corporate finance and treasury team.

And we are in good discussions with our board about how many dollars to allocate to each of those investments.

Yes, the stock price is low.

In fact, in our opinion, it continues to be extremely low versus our performance and that does weigh into the discussion we have around capital location on share repurchase options.

But there are other elements that factor into where we ultimately put our dollars.

And so, Bryan, I don't know if you would add to that at all?

No, I think that covers it.

The only -- the priority that we laid out was specifically growth, deleverage/liquidity, return cash to shareholders.

We conveyed our prioritization as such.

And so in the most recent quarter, our initial target was, again, to focus on the growth to continue to provide the expansion that we committed to on the Towables businesses and the investments that we've made there.

But then also to deleverage back into our targeted range of 0.9x to 1.5x, which as I stated in my prepared remarks, we accomplished in the quarter.

So I would just supplement Mike's comments with that.

Our next question comes from Scott Stember with CL King.

Maybe talk about -- I know the backlog is down year-over-year, but obviously you guys had a bit more capacity to this year.

But if you flush out the backlog and you look at the incoming orders, it looks like there was a nice jump over the fourth quarter, at least from a sequential standpoint.

So I think it's clear that the orders are there.

Can you maybe just talk about how that sets you up for the next I guess couple of quarters heading into the spring selling season from a growth perspective?

Yes.

Thanks, Scott, and good morning.

Well, let me start with Towables first.

That's probably a more directly correlated answer in the sense that we do remain pleased with our Towable backlog.

And as I said in my prepared statements, we stand today or at least at the end of the quarter at a little bit over 9,000 gross units there.

And that is in line with the amount of back orders that we think at the end of Q1 is a good base as we begin Q2 and go into the rest of the year.

And as you noted, we constantly have incoming orders from our dealers being generated by the respective Towables businesses.

And I do think we had a positive reception to the new products, as mentioned in our script as well for both the Winnebago-branded and the Grand Design brand at the September RV open house event in Elkhart, and that certainly helped a little bit.

But I can't put much more color on it than we're comfortable with our Towables backlog both in light of our own I guess future growth projections internally but especially in light of the industry.

And we've long maintained that backlogs in the RV industry are not always the best indicator of future performance because there may be other dimensions to why the back orders are the way they are.

That would ultimately have an impact on whether you have positive or negative shipment growth in the future.

But our Towables business backlogs we feel good about today.

The Motorized backlogs are a little bit more of a mixed story.

As Bryan talked about, there are some timing on the order side related to some of our rental business.

We feel especially strong with the Class B side and even our Class C backorder log has hung there in a bit.

Even though, if you look at our Q1 shipment performance there, you would -- you might not guess that.

Class A is where the majority of our backlog number for the motorized segment regressed.

And a good chunk of that is the absence of some of the new product orders that we took a year ago at the RV open house in the fall of 2017.

And so the RV -- the motorized business continues to be one in which we're making, we believe, net positive progress.

But it is at times not as consistent across the categories as we would like to see.

So I apologize for the rambling answer there, but Towables backlogs, we feel good about.

Motorized backlogs, we feel good in Class B. A little bit better in Class C. Class A we have some work to do.

All right.

And regards to the Motorized side, very, very nice improvement in profitability there.

Maybe just though walk us through, again, where you would expect ultimately the EBITDA levels in this segment to come out?

I know that the last few quarters or going back a little bit more than that was a little more difficult given the lack of knowing where things were going to turn out but clearly things are coming back here.

Maybe just talk about where you think this could go?

Yes.

I'll offer a comment, and Bryan, please, weigh in as necessary.

Yes, we are pleased with the Motorhome profitability recovery in this quarter year-over-year versus Q1 of fiscal '18.

To be a bit fair, we probably dipped lower in Q1 of F '18 than we should have.

But it is good to see the Motorhome margins continue to sequentially improve but also more importantly kind of improve year-over-year.

We do believe there's more runway there.

I'm going to be a little bit -- I'm going to hedge that comment just a bit for a couple of reasons.

One is, the material cost environment continues to be a [resister] of sorts to all of our RV businesses.

You saw some pressure on the Towable side this quarter, particularly input cost that we just could not timing-wise either drive out of the business or price out of the business.

Motorized though has done a nice job.

We believe that this Motorized business should operate at a gross profit level in the low teens and someday potentially in the mid-teens.

Now that would be extremely high from a historical RV standpoint to be in the mid-teens gross profitability-wise with the Motorized business, but that is our aspiration.

The challenge is with the material cost environment and with the difficult shipment environment that we're now facing within the RV industry as dealers have tightened up on their inventory and when and how they take products.

There will be some pressure points on motorized margin going forward.

But we are pleased with where we're at today.

We'd like to stay at that level and grow in the future.

That may be a quarter-by-quarter story.

But I think there's still more runway for us to be more efficient, come out with new products that generate innovation and higher margin levels.

And that will be our objective over the next couple of years to keep improving.

Great.

And just last question, Bryan.

You talked about on the operating cost side some cost for some outside folks that came in helping you with some of your initiatives.

Maybe just talk about that, a little more granular, and how long these potential costs could stay on the books?

And that's all I have.

Yes.

As you know Scott, and as we've talked about in the past, we're on a transformation journey.

And so from time to time, we're going to get some external help in that journey and supplement our internal resources accordingly.

I'm not going to provide a lot of granularity to it for competitive reasons as you can appreciate.

But these are -- our projects we did incur in Q1, there might be a little bit of tail as we head into Q2 here.

But they were rather isolated as a Q1 initiative.

Our next question comes from Seth Woolf with Northcoast Research.

So just thinking about some of the comments you made, Mike, with respect to retail, I think you said that flat retail in 2019 is going to be -- is a good aspirational target and there could be a little bit of downside.

So the two questions I have with respect to that comment are, number one, at what point in the year, once we -- you start the winter shows, will you feel comfortable saying, hey, it's going better than expected or it's -- maybe flat is too aspirational.

When do you think you might have a sense for when we'll have a better read on retail in 2019?

And then secondarily, if there is a little bit of margin for error and it comes in weaker than expected, what do you think a reasonable floor would be on retail declines next year?

And then if at that floor, how should we think about Winnebago and Grand Design's ability to outperform the rest of the market?

Yes.

Good morning, Seth.

Thanks for the questions.

First, retail timing.

I'm sure other OEM leaders have their own opinions on timing.

We're in a -- we talked about, especially with a lot of our investors lately, that this has been an industry certainly in transition from double-digit retail growth to single-digit retail growth.

And now in some of the recent months in which SSI has reported, at least its initial monthly retail results, you've seen the retail results dipped to the negative side now for several straight months stand-alone.

We have still, we believe, some pretty tough comparisons from a year ago on shipments and retail for the industry to comp against, probably between now and I would argue probably March, Sep of the spring.

I think the December, January, February and even March SSI retail numbers will be very interesting for us to all see.

And by then, as you know, we'll have the ability to go through several regional retail shows plus many of the dealers and their own open houses on their lots.

And then we have the new RV Industry Association, RVX event, I believe in the 2nd week of March in Salt Lake.

So I would say timing-wise, we should have a good read on sort of the market stabilizing around the new normal retail rate sometime in that March time period.

I think it could be difficult for us to produce positive comp numbers on shipments in retail as an industry before then.

But I will state, back to your latter question, that Winnebago Industries and our brands, we believe that we have the ability for at least the time being to continue outperforming the overall industry.

And as we've shown in some of our investor decks, our 3-month, 6-month and 12-month trailing retail performance has run anywhere between 15 to 20 points higher than the industry retail performance, and a lot of that is certainly driven by the momentum that we have on the Towable segment.

So it may be hard, Seth, for us to kind of maintain that retail performance gap at 15 to 20 points up, maybe that falls to 10 points up or 15, we'll see, but I think we can still continue to outperform.

And so last question or one of the questions you asked was is there a floor to our own retail thoughts?

I just hesitate to answer that because it would be purely a guess at this point.

In my comments, I certainly did state that flat for calendar year 2019 would not be the worst result.

But depending on some of the other factors that are weighing on consumers' minds, it could go up a point or 2 and it might go down more than that, into the low single-digit negative.

And so we'll have to see.

As you all know, there'll be some news out of the Federal Reserve today on their interest rate decision, and it's almost a week-to-week conversation in terms of business performance these days.

Okay.

Is it -- if it drops next year, and if it drops more, is it fair to think that it makes it harder for you guys to continue to outperform?

I guess, that's what I was getting at.

No, I think we can continue to, especially in our Towables businesses, have above industry average performance for some time into the future, if we continue to be focused on making great product, working with our dealer partners in a trusting, caring way and providing great service to the channel and to our end customers.

I think if we stick to our game plan, we have the ability to continue to take share in the Towables market.

And on the Motorized side, it's more about finding consistent performance going forward.

Month to month, we sometimes on the Motorized side now see a shipment or a retail share increase, but the next month it could be given away.

And so we're looking for consistency from our Motorized team now across their categories, not just in Class B where we've had a really good success, but across their categories.

So that is a little bit more inconsistent.

But I believe we can continue to outperform the industry for the time being.

How far the industry would potentially retreat would definitely have an impact on how accretive our growth or EPS could be to previous year results.

But we're not ready to get into that today.

We're more focused on Q2 now and executing our playbook.

Understood.

I appreciate it.

I guess, really quickly, Bryan, just thinking about the margins, excellent quarter out of the Motorhome business, and it's been a while.

So I guess, a lot of this seems to be operational improvements.

You guys talked about the different moving parts that are kind of working for and against the Motorhome business going forward.

As we go throughout the rest of the year, should we continue to think of this as a 5.5%, 6.5% EBITDA business, even given the environment that we're in from a shipment perspective?

And then on the Towable side, great share gains, but it looks like incremental margins were negative.

How should we think about that going forward?

And then you alluded to more price increases, it's an environment where dealers are destocking.

I mean, what kind of work have you done to make sure that it doesn't have an overly adverse impact on retail sales, because I think that would be probably a headwind stuff there.

Yes, for sure.

So I'll start with Motorhome, Seth, and Mike already talked quite a bit about the Motorhome profitability, so I don't want to spend too much time on it, on top of what his earlier comments were.

I will tell you though that the Motorhome team did a really good job with pricing.

There was a few price increases that were done during our fiscal 2018 that are obviously benefiting the margin equation sitting here today.

We had favorable mix from the Class B performance, so those things are sustainable.

I think we'll continue to see good results from our Class B business.

We had, as Mike alluded to, a low point in Q1 of last year where we had talked about the investments we were making in Forest City and new lines and bringing the Intent and the Outlook up on a new line and the productivity took a hit in Q1 of last year.

We're through that now, so that's sustainable.

And likewise, the West Coast challenges that we talked a lot about, from Q1 of last year, we think have largely been addressed thanks to the excellent work by the team out there, they've done a phenomenal job of getting that business operating at a much better level.

So all those things point to sustainability, Seth, with where we're at right now.

So we're going to continue to see cost pressures.

We'll see what happens with list 3 here that was scheduled to go in on January.

And I think everybody is wondering the timing, is it a go?

Is it a no go?

So I hedge my comments only knowing that there is continued uncertainty as to the direction that the administration will take that and the pressures it will create.

So I guess those are the supplementary comments I make about Motorhome.

Turning to the Towables business, I already talked in response to Craig's question on discounting that we executed in the Winnebago-branded Towables business.

That was certainly a headwind to margins in the quarter and a necessary reaction to the pressures that they're facing in the market considering the positioning of their product relative to market.

And the fact that it's still an evolving brand that we're working hard to mature and make more prominent.

But nonetheless, we're subject to the pressures of the industry right now and it's certainly the case in the Winnebago-branded Towables business.

The strength of the Grand Design portfolio is obviously continuing and we think that we will be in the position of taking more pricing to offset the material cost inflation.

That's what I was referring to in my earlier comments and that those price increases will be rolled out.

We feel like we have the positioning within the Grand Design portfolio to do that.

And so I expect that margins will see some improvement as we execute on those pricing decisions.

And as we -- ideally in the Winnebago-branded Towables business are in a better position to discount less going forward as well.

So I'd offer those comments, Seth.

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

Just curious on the, I guess, on the improvement within the margins on Motorized side.

Can you just talk about how much of it was driven by kind of product mix?

You shipped a lot less Class As in the quarter, and I think that's where the core issues have been on Motorized side.

Can you just talk about how that impacted the quarter and maybe if the Class A had been flat and some of the others have been down more, maybe how that would have impacted the margins?

I guess I'm just wondering where we are on the Class A improvement margin side?

Yes, I think Class B and the strength of Class B in particular was a favorable mix.

But that said, if we had, had a lot more of a Class A and Class C strength, I don't want to convey that, that would have diluted margins and that it was a huge mix issue.

I think it was largely a pricing aggressiveness that offset the material cost increases and then addressing the operational, what I'll call operational inefficiencies that we saw during the first half of last year.

So it's primarily that, that drove the improvements in the margins.

Okay.

And then just on the margins versus the Towable side, it seemed like -- I thought the comment was that the commodity cost pressures impacted the Towable side more so than the Motorized side, and I'm just wondering why that would be the case.

Are you behind in kind of passing those price increases on versus the Motorized, or are they kind of on par with each other?

Yes, fair question.

The Motorized business, recall, is more vertically integrated that creates some of that difference or at least creates difference in the timing of when those costs might be incurred.

But it also is an internal hedge against the increases.

Towables business is more exposed to pricing increases that are passed directly to them from the vendors.

So I think that, that is one of the differences.

And then I will also say that the Motorized pricing timing was weighted more towards the early.

The Towables business has been more gradual in the recovery of the pricing.

So I think those 2 things are really what I would call out as some of the differences in between the Motorized margins and the Towables margins.

Okay.

And then maybe just lastly on CapEx.

I don't think I heard it, but where do you see that playing out for the year?

I mean, it seems like -- based on your commentary about aspirational retail, I mean, would you expect CapEx to be down this year?

And then maybe what's reasonable run rate in kind of a flat environment generally?

I mean, obviously, that's not typically available but just curious what that might be.

Yes, we're going to take a cautionary approach to CapEx in our investments there given the environment that we're in.

We'll have investments that we have committed to in the form of the expansion projects for the Towables businesses and the completion of those obviously.

And we think that those are still prudent investments to make even in the environment that we're in.

But I think a reasonable rate to use this year for now would be in the $35 million to maybe $40 million.

But like I said, Mike and I will be keeping a very close eye on the environment that we're in and pulling back or even accelerating those investments as we think prudent.

Our next question comes from Gerrick Johnson with BMO Capital Markets.

The inventory on your book, sub-25%, can you discuss that a little bit?

I'm sure there's some Chris-Craft and higher input cost.

But maybe if you could break down the components of the inventory increase and how you feel about it?

And that increase that you're citing is versus the year-end?

Year-over-year.

Year-over-year, Q1-to-Q1.

Yes, I think that there's a couple of things going on.

We've got increases in our chassis inventory that we have taken on for strategic reasons, that's one thing driving it.

We certainly have higher finished goods on our lot just by virtue of the industry dynamics that we're in.

And so those 2 things are going out.

So some of it's industry driven and some of it is indeed just timing.

Another factor, as the industry slows down, you've got purchases that are coming in the door that you're continuing to adjust downward and so you have got some timing that you deal with on inventory in that regard, too, and that would be what I'm referring to, there is raw inventory.

So primarily an inventory thing and some AR as well.

And that just gets to some of the timing of orders when they happen year-over-year but nothing systemic that I think you should assume in your models that, that would be resolved in other words I would anticipate in Q2.

Okay.

And then in Motorized, you're basically able to double Class B capacity.

How are you able to do that?

And how are you allocating production and capacity across Motorized?

Yes.

Our Class B production, Gerrick, is run out of a couple of facilities in North Iowa, and we're very pleased with the manufacturing and the operations team ability to continue to allow us to grow shipments and share in Class B within our existing infrastructure.

And so it is a lot of hard work in terms of being able to reflow the operations within -- particularly the biggest Class B plant and increase throughput, reduce tech time with no sacrifice, certainly we hope on product quality and reliability once those products are built.

It's funny that you've raised the topic in this way, I've recently asked our team, some of the what-if questions about the potential we have in Class B and how and if this category continues to grow in the future, what our plans are in the very long term to continue to keep up with our potential.

So it's a very active ongoing topic right now with our Motorhome manufacturing team.

And we believe in North Iowa we have plenty of capacity in terms of space and also labor to be able to find ways to continue to grow Class B. But the team is doing a great job, and they worked very hard to keep up with our potential in that market, and we have every intention of making the investments necessary to not let our manufacturing side be a constraint on our Class B growth in the future.

Okay.

Just quickly a follow-up, you brought it up so I'll ask the question about it.

You mentioned warranty and that's been an issue for Thor.

How is your warranty expense affecting your margins in this quarter as compared to last year?

Yes, our warranty expenses over really the past number of quarters has been quite stable.

I would probably characterize them as flat.

I'd have to go look at each of the individual businesses but on a consolidated basis they're probably running about flat.

And we always want to be careful here of being overconfident because we've had quality issues here and there certainly in our past.

But we view that as one of the differentiators within our business model.

And our teams at Grand Design, at Winnebago Towables and at Winnebago Motorhomes are -- and in Chris-Craft are focused on superior product quality versus the competition every day.

And our employees do their best to try to deliver that to our dealers.

And I think a high majority of the time we do, and when we fall down, we take care of the problems, own up to them and resolve those in a hopefully expedient way.

But yes, it has not been a major deterrent.

I wouldn't tell you that warranty rates are getting materially better, per se, they're just pretty stable.

But stable in this industry right now is a good thing, and the dealers do give us credit, especially on the RV side for us working hard to try to deliver products to them that show up and have been inspected and are in good shape and are ready for retail sale with minimal dealer work on their lot.

So it's definitely a part of our recipe for success going forward.

Our next question comes from Michael Swartz with SunTrust.

Real quick one for me.

I think everything that I wanted to ask has been asked.

But as people were kind of bandying about the possibility that, that retail continues to slow or decline in 2019, maybe you can just frame I guess your cost structure for us and then maybe relative to 5, 10 years ago.

I know you guys weren't here at this time.

But I mean, in terms of variable versus fixed cost structure, how does the business look today?

How did it look maybe going into or during the last recession?

Well, Michael, good morning.

I'll offer a comment first, Bryan, and then ask you to follow on.

I would say from a macro standpoint, in some ways, we've always had a highly variable cost structure.

And the great work that was done 5 or 10 years ago by leaders at Winnebago Industries before those of us on the call got here, I think they were always focused on having a highly variable cost structure.

I would contend that what's different today is -- and I'll let Bryan speak to that cost structure specifically, what's different today is 2 things.

One, our portfolio mix is different.

And so we have a less vertically integrated component of our business in Towables, which is growing, whose gross profit margin tends to run higher than Motorized, but it has less innate vertical integration infrastructure around it.

Secondly, we are very focused today on operational efficiencies, productivity, even things like employee safety, which improve the culture, workplace retention, can even lower [cost at times.] But our teams are becoming more effective at driving waste out of the organization where they see it.

And we're not as formal from a lean standpoint as we'd like to be someday, but we're getting better every quarter with identifying projects.

And so I would say our flexibility in addition to variability of our cost structure has also improved here over the last 3 to 5 years.

Bryan, any other thoughts there?

Yes, I think you mentioned, the portfolio is very different today than it was during the last recession.

But that said, at a high level, if you look at our cost structure as a percent of sales, it really hasn't changed that much, and we continue to analyze that.

And we work hard to retain that variable nature so we can react given we're in a cyclical industry.

But I think I said this at the investor meeting last year that we were about an 80% to 85%, depending on the business you're looking at, 80% to 85% variable cost structure, and that is consistent with where we are today, and it's consistent with where we were when we were singularly motorized company.

So we have retained that flexibility to react in any kind of downturn.

Our next question comes from David Whiston with MorningStar.

If a downturn did hit sooner than later, are you guys comfortable with the balance sheet's debt levels where they are now?

Or do you think you would be caught flat-footed a bit?

We take great pride in managing that closely and always understanding where we're heading and what kind of downturns could come.

And so no, I don't think we're flat-footed at all.

In fact, we're well prepared to sustain a downturn, and we will manage very aggressively, should a downturn start to affect our performance in a more meaningful way.

Right now, as we just disclosed, we've got great growth and good cash flow and it continues to allow us to pay down debt.

So we're feeling confidence sitting here today of our position on the balance sheet.

Okay.

And on discounting, is that -- what you've seen recently, was that pressure really all on the Winnebago Towable side?

Or is it also on the Motorized side?

And then second part to that question would be, you talked earlier about how the Winnebago Towable brand is a relatively young brand in towables.

So how do you balance protecting the brand, which Mike I know you've talked about many times is so important versus staying competitive in that market when you're trying to differentiate yourself from these established players in towables.

Yes.

Thanks, David, for the question.

I'll speak first to the breadth of the discounting.

The answer is yes, our Winnebago-branded RV businesses, both Motorized and Towables are more susceptible to the pressures of industry-wide discounting, especially discounts offered by OEMs to dealers to take product into the channel.

Those have a more competitive direct impact on the 2 Winnebago businesses, largely because the business model still has a legacy of negotiating on a more individual basis with the dealers that carry our products.

That is something we certainly are doing everything we can over time to try to get away from.

A great credit and kudos to the Grand Design team, who when they started their business 6 years ago took a very fundamentally, philosophically, pure stance on how they would take orders from dealers, how they would price orders and starting with a white piece of paper, they were really able to come out of the gate with a business model that, again, to their credit, to our credit now, we remain committed to.

The Winnebago side RV business is one where we hope to evolve to a place where we're less impacted by competitive discounting in order to reach our sales and profit goals.

But that's a journey.

Specific to Winnebago Towables, it is a relatively young Towables business.

We bought that business in late 2010 from a company called SunnyBrook.

And while we're pleased inordinately with the progress that has been made, especially in the last 2 years, we admit very publicly that we have much more work to do to mature in that business.

The product line has been very centered around travel trailers, especially lightweight travel trailers.

And Scott and his team have done a great job there taking share in the spaces they compete, but we have no presence of significance today in stick and tin.

We have no presence of significance in sort of mid- and high-profile fifth wheels.

And our toy hauler line is just now being reintroduced with the introduction of the recent SPYDER.

So Bryan and I both had the opportunity this week to be on the Winnebago Towables campus and to walk the new buildings that we are opening up for both assembly and lamination there that will allow that business to continue to grow, but will also be the home to some of these new products we're introducing.

So as the Winnebago Towables business strengthens its product line, as we continue to create a stronger team and culture there, and as we continue to earn trust with more A and B dealers in the RV industry, that business should not only be able to perform better but should be able to protect against variability in its financial performance in a more consistent way.

So a great question, definitely a work in progress, but one as you know we're strategically committed to so that people can get into the Winnebago brand at a more affordable place than they otherwise could if we were only a Winnebago Motorhome business.

Just one more question that's on rental.

Reading between the lines today, it sounds like perhaps rental is not going to be as good as it was last year.

And if it did come in a lot softer, how much is that going to mess you up meeting your fiscal '19 projections?

Well, I would be careful on "not going to be as good." I think there's a -- we have a little bit of a timing situation here with some of the rental business.

As Bryan mentioned, we're having good discussions with a number of our rental partners.

I'm actually confident that we may have a path to come out with a net positive market share increase on the rental business, specific to Motorized in our fiscal 2019 year, and I won't get into details of how much and to whom, but I do believe where the industry slowdown is having an impact on the rental side is the turning of the fleet that these rental companies go through.

As you know, they buy units from the OEMs, they use them for a period of time as rental units, and then they dispose of them either selling them direct to end customers or in many cases trying to find other independent dealers to take that rental inventory and then those dealers will sell it.

As the industry has slowed a bit, and obviously all dealers are more acutely managing their inventories, I think that fleet turn on the rental side is probably slowing a bit.

And again, the rental market is a meaningful but not a huge percent of the Motorized business.

So for us, it's been more of a timing as we've been working with each of these rental companies on, how many units do you want?

When do you want to take them?

But in some cases, we're getting more from rental companies than we have before, and in other cases maybe we're getting a little less.

We think it'll be a net positive gain from our Motorized team this year.

Our next question comes from Greg Badishkanian with Citi.

It's actually Fred Wightman on for Greg.

Just one quick one.

I think earlier you had mentioned that dealer inventories were improving month-over-month.

I'm wondering if you could just expand on that a bit.

I think in the past you've talked about 20% to 25% of dealers having a bit more inventory than you'd like.

So how is that sort of trending today and where do you sort of see the inventory levels going forward?

Well, I think they're getting better sequentially.

We aren't always at -- we don't always have the industry field inventory information on our fingertips, but I was pleased to see the comments from Thor Industries in their last earnings call about their field inventories year-over-year being in more positive ranges than previously.

And so obviously with Thor being such a large part of the RV market, that's probably as good a barometer as we all have as anything.

But we talk to the -- especially the inventory finance companies regularly.

And again, consistent in some ways to previous calls, there's no panic going on there about the aging.

Turns have certainly slowed a bit as retail has slowed.

But dealers are being very prudent in their restocking behavior.

And I don't have a probably a percentage I would offer this time as to which dealers are still over-inventory.

I think it certainly continues to decrease.

What we like on our side is we're also seeing a sequential improvement in our field inventory levels from the prior 2 quarters.

And even as we sit here today, 3 or 4 weeks into our second quarter, our field inventory level today is less than it was percentage growth-wise than it was at the end of Q1.

So we continue to go the right direction there as well, although we've always maintained that our field inventory levels are appropriate even with an increase based on our market share growth, our new products and the way we're trying to increase the quality and quantity of our dealer network on the Winnebago side.

So again, I think every month it gets better.

I think next spring will be very important to kind of see dealers come out of the winter and how optimistic or not they are about retail prospects going into the spring selling season based on shows, open houses, other things.

So I think we'll have a really good look at that as I mentioned to Seth and the -- probably the February-March time period.

Our next question comes from Steve Litt with 4010 Capital.

Yes, hi, my question was answered.

Thanks.

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

I would now like to turn the call back to Mr. Steve Stuber for any further remarks.

Great.

Thank you, everyone, for joining us today.

On behalf of Mike, Bryan and everyone here at Winnebago Industries, we wish you happy holidays, and all the best for the New Year.

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

This concludes today's program.

You may all disconnect.

Everyone, have a great day.