Winnebago Industries Inc (WGO) 2021 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

And welcome to the Q3 2021 Winnebago Industries Earnings Conference Call.

(Operator Instructions) Please be advised that today's conference is being recorded.

(Operator Instructions)

I would now like to hand the conference over to your speaker for today, Steve Stuber, Vice President of Finance.

You may begin.

Thank you, Towanda.

Good morning, everyone, and thank you for joining us today to discuss Winnebago Industries' Fiscal 2021 Third Quarter Earnings Results.

I am joined on the call today by Michael Happe, President and Chief Executive Officer; and Bryan Hughes, Senior 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 third quarter results and the quarterly earnings supplement were issued and posted to our website earlier this morning.

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

The company cautions you that forward-looking statements involve a number of risks and are inherently uncertain; and a number of factors, many of which are beyond the company's control, could cause actual results to differ materially from these statements.

These factors are identified in our SEC filings, which I encourage you to read.

With that, I would now like to turn the call over to our President and CEO, Michael Happe.

Mike?

Thank you, Steve, and good morning, everyone, and thank you for joining us today.

As always, we deeply appreciate your interest in Winnebago Industries and taking the time to discuss our fiscal 2021 third quarter results.

I will begin with an overview of our performance before turning it over to Bryan Hughes, who will discuss our financial results in more detail.

Then I will offer some closing thoughts, and we will conclude the call by answering your questions.

Before we dive into the drivers of our performance, I would like to take time to acknowledge the significance of the comparative period just 1 year ago, third quarter of fiscal year 2020, and how far we as a company, as an outdoor recreation industry and as a country have come since those difficult days.

In those challenging and uncertain early weeks of the pandemic in spring of 2020, Winnebago Industries suspended our manufacturing operations while we work with our team and suppliers to develop the safety protocols necessary to keep our people safe.

Thanks to the incredible resolve of our now 6,300-plus strong Winnebago Industries team members, we eventually reopened our plants and offices and have worked as safely as possible ever since to meet the rising record demand of a consumer, whose priorities and preferences for the outdoors have changed in ways that will be felt for generations to come.

It is also remarkable that as we sit here today, our scientists, health care professionals, public health officials and the broader pharmaceutical industry collaborated to bring effective and safe vaccines to market in record-breaking time, helping us to slow down the spread of the virus to levels with which we can live carefully through today.

Our gratitude is immense to all those involved.

We believe the pandemic not only accelerated some existing purchase intent within the recreational vehicle and marine markets these last 15 months, but we are equally convinced there has been, is and will be a meaningful expansion of interest and engagement in the outdoors that will benefit our business and industries for many years, even through unavoidable cyclical periods that have been and will be a part of the outdoor economy for decades.

Today, more families than ever are seeking ways to enjoy the outdoor lifestyle.

With 10.1 million households having camped for the very first time in 2020 and another estimated 4.3 million households undergoing their own rookie camping experience as well in 2021, our team is helping to meet increased demand for our products and brands while delivering record financial performance.

More new families, more first-time buyers and more diverse customers, getting their taste of what exploring this great country via the open roads and expansive waterways is all about.

Now some will look for signs of fallout of first-time buyers and challenging comparative periods in the short term to record retail demand a year ago.

But others like us see a net positive new wave of engaged enthusiasts, especially millennials and younger generations, who are actively now shifting their available time and income to invest in a lifestyle that is rewarding and accommodating to countless use cases personally and professionally when using our products.

Today's fresh memories for youth, first-time explorers and even veteran outdoor participants will be the foundation for our industry to grow from in the decades ahead.

We are long and bullish on America's outdoor recreation economy and the place in that ecosystem Winnebago Industries will hold in the future.

So I want to take a moment and thank our employees for their continued perseverance and dedication to Winnebago Industries, our channel partners for their continued loyalty and our end customers for their love and engagement with our tremendous brands.

I'm incredibly proud of the progress we have made in the past year, and it is all due to our team, which we serve as leaders here at the company.

Our results for the third quarter of fiscal year 2021 continue to build on the momentum we have generated throughout the fiscal year.

In the third quarter, Winnebago Industries grew net sales to a record $960.7 million, representing a 139% growth year-over-year and an organic ex-Newmar growth of 53% over our pandemic fiscal third quarter in 2019.

Our 2-year performance demonstrates not only the exceptional growth in consumer demand for pursuing the outdoor lifestyle, but also that Winnebago Industries has continued to diligently execute to meet that demand while growing market share at the same time.

As of April 2021, our RV fiscal year-to-date market share is now 12.5%, up 40 basis points from the same period last year.

Winnebago Industries top line performance in the third quarter also represented 14% sequential growth over our fiscal 2021 second quarter.

And while we do not talk about sequential growth, typically for seasonal reasons, given the unique nature of our comparable periods because of the pandemic's impact on a year ago's Q3 results, it is helpful in demonstrating our sustained revenue growth throughout the year and speaks to the stickiness of consumer demand.

Though catalyzed undoubtedly by the onset of the pandemic, demand for our products has remained strong as the vaccine rollout and gradual reopening across North America has picked up.

Our team has stepped up production output as a result.

The golden threads of quality, service and innovation extend to everything we do and were a significant driver of our strong profitability in the third quarter.

The craftsmanship and quality of our premium products at every price point and across each of our Winnebago, Grand Design, Newmar and Chris-Craft brands enables us to continue to grow our market share, even at historically low levels of discounting.

Similarly, the superior service and support we provide our consumers through deep partnerships with our dealers affords us the ability to execute carefully considered pricing actions to reflect the surging demand for our products, but also offset the real input cost inflation that is present across our industries.

Our enterprise-wide build-to-order production approach also continues to serve us well, as we remain disciplined considering ongoing supply chain challenges.

Our consolidated working capital and overall profitability remain improved.

At Winnebago Industries, we often talk about the importance of our dealer network relationships and the strength of those partnerships as a critical differentiator.

Our dealers are committed to our premium brands, and they have not sacrificed their dedication to customer satisfaction at any time through this pandemic.

The dealers have done an exceptional job of managing through lower inventory levels than desired and rising sales and service demand.

They continue to express their confidence in both the future retail demand environment and in Winnebago Industries as an OEM through increased levels of backlog orders.

We are also committed consequently to working closely with our supplier partners to meet that order appetite as quickly as possible.

But as always, safely, and delivering high levels of product quality always.

Our record sales in dollars and units in fiscal 2021 third quarter show that we are sequentially determined to invest in finding ways to increase output.

We continue to experience demand-driven supply chain challenges that restrain our operations from reaching full production capacity and have been facing various ways of inflation pressure as well in the last 6 months.

The impact of these supply-based inconsistencies is evident in some of the segment results.

But our team is working closely with our supply chain partners to manage through these conditions with flexibility, nimbleness and process discipline as much as possible.

We are grateful for our supplier relationships and all they are doing to feed our assembly lines daily.

With that opening, I will now turn the call over to Winnebago Industries' Chief Financial Officer, Bryan Hughes.

Thanks, Mike, and good morning, everyone.

Before diving into the numbers, I thought it would be helpful to reference our press release, in which we employed the use of sequential comparisons to our second quarter ended in February, in addition to the typical and customary comparisons to the prior year.

We provided this as a means of disclosing additional context for the strong results we are reporting for our third quarter ended May 29, 2021.

As a reminder, the prior year third quarter was significantly impacted by the roughly 6-week shutdown period that we imposed on our operations in response to the COVID pandemic and our imperative to keep our employees and other stakeholders safe.

As a result, comparisons against this prior year are less meaningful in providing context for this year's performance.

With this in mind, our third quarter consolidated revenues, gross margins, EBITDA margins and EPS were all significantly ahead of the prior year results.

Our strong sales generated substantial operating leverage and improved yield, and also reflected the strong demand driven by interest in our products.

In short, we had record results in sales and EPS, and our great term -- our great team, excuse me, deserves a lot of credit for executing a terrific third quarter.

I would ask you to refer to our earnings release and Form 10-Q for a full review of the results of this year's third quarter and the year-to-date results compared to the prior year.

Due to the significant disruption in Q3 of last year, I will discuss our performance compared to 2019, where helpful, 2 years ago, and also sequentially, meaning compared to our second quarter results released last quarter to provide additional context.

Sales increased by 81.6% as compared to 2 years ago or third quarter 2019, representing strong organic growth of our brands and also benefiting from the acquisition of Newmar.

Sales increased by 14% in Q3 as compared to Q2, representing the continued efforts by our supply chain and our team to generate increased output to meet the very strong demand that our dealers and end customers are exhibiting for our products.

This is also demonstrated by the record backlog related to dealer orders, up an additional 18.2% versus Q2.

While we continue to address the ongoing constraints presented by the supply chain, we are pleased to see the sequential progression in our output and shipments to our dealer partners.

Gross margins of 17.7% increased 130 points versus the 16.4% of third quarter 2 years ago, driven by cost savings initiatives, product mix and productivity improvements.

Gross margins declined modestly in Q3 compared to Q2, 17.7% in Q3 as compared to 18.6% in Q3 -- in Q2, excuse me, driven by labor productivity impact from some of the supply chain inconsistencies, timing of investments in the business and higher material costs.

Margins of 17.7% in Q3 were well above our historical run rate and reflect primarily the improvement in the Motorhome segment.

Net income increased to $71.3 million in Q3, which is up 97% or almost double what was delivered 2 years ago.

Net income increased 3% compared to the $69.1 million in Q2.

Reported diluted EPS of $2.05 in Q3 compares to a reported diluted EPS of $0.37 in the prior year period and sequentially compares to a reported diluted EPS of $2.04 in Q2.

Adjusted diluted EPS of $2.16 in Q3 compares to $2.12 in Q2.

Diluted EPS was $1.14 Q3, 2 years ago.

In summary, Q3 was up significantly across all metrics when compared to our Q3 2 years ago and showed a sequential improvement in sales, profit and in EPS, driven by continued sales growth in a very dynamic demand landscape and supply chain environment.

Now I'll turn to our segment performance, starting with Towables.

Revenues for the Towable segment were $555.7 million for the third quarter and increased 26.5% sequentially versus the second quarter, driven by elevated output and supported by strong consumer demand for our Grand Design and Winnebago-branded products.

Winnebago Industries' unit share of the North American towable market on a trailing 3-month basis through April 2021 was 11.4%, reflecting an increase of 90 basis points over the same period last year.

Segment adjusted EBITDA was $80.1 million, up 28.5% sequentially or compared to the second quarter.

Adjusted EBITDA margin was a strong 14.4%, increasing from 14.2% in Q2, as continued leverage and pricing, combined with lower discounts and allowances, helped to offset rising costs driven by inflation.

Backlog increased to a record $1.5 billion, an increase of 17% versus the second quarter, reflecting continued strong consumer demand, combined with extremely low levels of dealer inventory.

Next, let's turn to our Motorhome segment.

In the third quarter, revenues for the Motorhome segment were $385.3 million, up 1% sequentially compared to the second quarter.

As Mike mentioned, our motorhome products are in high demand, but results were limited by our inability to keep pace with the very strong demand due to certain supply chain challenges across many of our motorhome models.

Segment adjusted EBITDA was $37.5 million compared to a loss of $10.8 million in the same period last year.

EBITDA in Q2 was $51 million.

EBITDA margins of 9.7% remained very strong relative to the 4% to 5% recorded historically, and is down from a record Q2 due to a different product mix, lower productivity due to the supply chain inconsistencies and also investments in the business, including the very successful dealer meeting held by the Newmar business.

The Newmar EBITDA margin of 9.7% was well ahead of EBITDA in Q3 of 2019 at 0.2%, reflecting the significant improvements from our cost savings, productivity and product mix.

Backlog in the Motorhome segment increased to a record $2.2 billion, an increase of 323.3% over the prior year and an increase of 21.2% versus Q2 as dealers continue to experience significant reductions in inventories due to extremely high levels of consumer demand.

While we are experiencing inflationary pressures and remain conscious of competitive dynamics that may impact our net pricing equation as well as continued supply chain inefficiencies caused by certain chassis or component constraints, we continue to expect to achieve a level of sustained profitability that is notably above the 4% to 5% EBITDA margin we've delivered in this segment historically.

While we are pleased to see this meaningful improvement, we have more work ahead of us in the areas of productivity and labor efficiency, asset utilization and the positioning and health of our product line.

Now turning to the balance sheet.

Driven by consistent levels of gross debt, growing levels of cash and consistent growth in adjusted EBITDA, our leverage ratio or net debt to adjusted EBITDA is now 0.5x.

We have strong financial flexibility to invest in the business, pursue value-added M&A opportunities and support shareholder returns.

Our liquidity, including our currently untapped ABL, is just short of $600 million.

Cash flow from operations was $148 million in the first 9 months of fiscal 2021, a decrease of $14.5 million from the same period last year.

On a year-to-date basis, we're benefiting from our improved profitability and working capital improvements driven by our made-to-order model that were more than offset by changes in working capital required to support increased production and rapid sales growth as well as additional working capital from supply chain challenges.

On a quarterly basis, cash flow from operations was $81 million in Q3, which is an increase of $11.4 million versus the $69.6 million in Q2.

Our effective tax rate in our fiscal third quarter decreased to 22.8% compared to 25.3% in the same period last year.

For the full year, we currently expect our tax rate to approximate 23% to 24%, excluding all discrete items from year-to-date results and those that may occur in the remainder of the year.

Our capital allocation priorities are focused on investing in organic growth opportunities for our businesses, executing strategic expansion to our portfolio through M&A, maintaining our leverage ratio within our targeted zone, maintaining a strong liquidity position and returning cash to shareholders.

During the third quarter, we paid a dividend of $0.12 per share on May 19, 2021, and our Board of Directors just approved a quarterly cash dividend of $0.12 per share payable on June 30, 2021, to common stockholders of record at the close of business on June 16, 2021.

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, back to you.

Thanks very much, Bryan.

We continue to meet the social challenges of the day with grit, determination, compassion and an intense focus on the safety and well-being of all members of our team.

I am incredibly happy to report that COVID-related impacts to our labor force are at their lowest level since the pandemic started.

As we begin to take steps into a brighter, less socially-distanced future, we are proud to carry out our mission of providing families and friends with access to beautiful outdoor spaces.

In doing so, we will continue to support our employees by serving them in communities where they live, work and play and optimizing our ESG performance across our organization.

To that end, we announced 2 exciting new community initiatives in the recent third quarter.

First is our participation in the United Nations Global Compact, a corporate sustainability initiative designed to advance universal principles on human rights, labor, environment and anticorruption.

We joined over 12,000-plus global signatories, including several others in the outdoor recreation industry in supporting United Nation Global Compact's 10 principles and integrating these principles into our company's strategy.

Additionally, the Winnebago Industries Foundation has partnered with Habitat for Humanity, a global housing nonprofit to support their community-based neighborhood revitalization efforts.

The partnership includes a significant financial donation in support of Habitat's RV Care-A-Vanner program.

These organizations' missions are clearly aligned with Winnebago Industries' values and enable more communities to enjoy the outdoor safely and equitably.

Winnebago Industries remains committed to advancing our core values in our operations and our communities, executing on our strategy, capitalizing on opportunities created by favorable market dynamics and innovating to sustain the unique appeal of our products with consumers.

You will continue to hear more about our corporate responsibility momentum within our enterprise in the future and the incremental resources we will allocate.

It is not only who we are, but it is how we do what we do.

As Winnebago Industries enters the final quarter of fiscal 2021, it is safe to say that we are in exciting and yet unique time still.

Field inventories in the RV and marine markets remain at almost historically low levels when using inventory turns as the metric.

Retail demand and interest remains very strong for our products as we enter the summer months, even as the outdoor industry potentially faces unprecedented retail comp periods versus a year ago.

While there are a few reports of some consumer retail order cancellations attributed to product delivery lead times or price increases in recent months, the high, high, high majority of retail orders are indeed intact, and we believe dealers will honor a high percentage of their backlog orders for the foreseeable future.

Retail financing remains available and affordable, with lenders staying disciplined in most cases on approval criteria.

And lastly, and certainly importantly, all stakeholders are managing to the best of their ability the implication of rising material input costs, tight labor markets and component availability challenges.

Regardless of the above topics, we are pleased with our results and are convinced that our teams at Winnebago Industries are managing these dynamics as well, if not better than most of our peers.

We will maintain our focus on executing our proven strategy to build a differentiated, premier outdoor lifestyle company and drive long-term value for end customers, dealers, employees and shareholders.

Our market share progression validates that we are improving our overall competitiveness every quarter.

Our financial results are demonstrating consistent, credible, sustained traction on improving profitability, creating very strong cash flow and managing our assets effectively, while preserving financial stability and liquidity for both strategic growth opportunities in the future, but also any uncertain times ahead.

We are continuing to invest in our business to ensure we are best positioned to meet the persistent elevated demand we anticipate in quarters and years to come, driven by the secular and ongoing growth in outdoor lifestyle products and consumer priorities for leisure and family activities, and our own ability to grow faster than the market.

We have mentioned our need to add capacity across the Winnebago Industries' enterprise in previous earnings calls.

These plans were foreseen in our previous year's long-range plan exercises and were validated again during our most recent long-range plan.

In the immediate future over the next 12 to 18 months, we will add capacity in many ways, building new facilities as well as reengineering existing business processes, operational flow or building redesigns.

Capacity is being added inorganically via new spaces and more square feet at Grand Design, Chris-Craft and Newmar, and organically through continuous improvement initiatives on the Winnebago brand and on every campus in the company.

These investments should be a clear sign of our confidence in the future, both in terms of the vitality of the end markets, but also our market share prospects led by the development of many yet-to-be-announced, innovative new products in our pipeline.

Now before we open the call to questions, I want to touch quickly on expectations for the RV industry as we enter the last quarter of our 2021 fiscal year.

Given continued strong consumer demand, we expect that RV industry annual fiscal year 2021 retail sales will grow in the high teens and that calendar year 2020 retail will likely be in the low to mid-teens, given the back half 2020 comp pressure we have alluded to in this call.

We believe industry wholesale shipments will grow approximately 50% annually in our 2021 fiscal year, and we are aligned with the RVIA forecast of approximately 34% more shipments for the industry for the full 2021 calendar year.

And finally, I will take a moment to reiterate my immense appreciation to the world-class Winnebago Industries team, without whom we would not be sharing such outstanding results today.

Our team truly believes in our core value system and takes pride in creating the world's finest outdoor lifestyle products.

Bryan, Steve and I are honored to be a part of such a dedicated and talented group as we continue to serve our employees and the communities in which they live, work and play, along with the customers who count on our brands as their conduits to extraordinary experiences in the outdoors.

That concludes our prepared remarks this morning.

Thank you for your time today.

I'll now turn the line back over to the operator for the Q&A session.

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

Mike, you just provided some guidance with respect to 2021 calendar, retail and shipments.

Could you just repeat what you said for retail growth and for wholesale growth in 2021?

Yes.

Craig, thanks for the question.

My projections, albeit noted as conservative by many on this call and past quarters, have been updated.

We believe calendar year 2021 industry retail will be likely somewhere in the low to mid-teens, given the back half 2020 comp pressure that we've alluded to in this call and in previous quarters.

Certainly, we hope that could be higher, but that's our estimate as of today.

And for shipments, Craig, we are aligned with the RVIA industry forecast of approximately 34% more shipments for the full 2021 calendar year.

And I think we certainly all agree that, that number is probably influenced as much as anything by the supply chain constraints in the way that all of the OEMs in the industry navigate through that for the rest of the calendar year.

So it's dangerous to do math on a live conference call, but I mean if I do that math, I think you're looking at retail units near 575,000 units in wholesale, around the same number.

So implied in your guidance, are you saying that the industry will make 0 progress almost on the inventory -- the need for inventory?

Craig, without commenting on the specific numbers you referenced, I will state that the industry is currently struggling to add more inventory to the dealers' field inventories.

And by the end of the calendar year, we may not have made very much progress compared to where we were at the beginning of the year.

That is mostly attributable to the retail demand that we continue to see in 2021.

But we also have to give ourselves credit as an industry that we were able to keep up with that retail demand.

And the industry has been producing at above 50 -- shipping at above 50,000 units monthly here in some of the recent past couple of months, and we expect that trend to continue in the future.

So it's a -- the end result is certainly not the news that certainly our dealer community would like to hear.

But I think it's a function of great retail demand sustaining even past a period where there were some skeptics that doubted that RV retail demand could sustain itself, given the onward positive march of vaccines.

But again, the industry is also doing a great job of shipping as much product as we can to keep up with those record retail levels.

And then just on the balance sheet, either Mike or Bryan, what's the Board's view on a share repurchase program, given the -- where your stock is trading relative to what looks like a fairly bright outlook?

Yes.

Well, this is Bryan.

Craig, I'll first comment on management's view, which is aligned with the Board's view.

We'll continue to follow our capital allocation priorities, as I stated during my comments.

Share repurchase is certainly one of the tools or dials really.

I wouldn't call it an on-off switch.

It's a dial.

We'll continue to evaluate some of the other priorities we have and in particular, the growth opportunities.

And then within the context of also managing our leverage ratio, which as we've said during the call, is at 0.5x.

So we'll continue to collaborate with our Board, inform them of our intentions on share repurchase when we think it makes sense to do so, in light of those growth opportunities.

But it's certainly one of those dials that we're keeping a close eye on.

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

Congrats on a very, very strong quarter.

Speaking to the sequential downtick from Q2 to Q3 in gross margin, albeit it's still very, very high levels.

But you talked about labor, supply chain and things like that.

Can you tell us what are you guys doing to potentially offset that, whether it's through price increases?

And also talk about what you're seeing on the discounting front and input costs?

So Scott, on the discounting side, as it is relevant to shipping product into the market in both retail and product, we continue to see both consistently low levels of discounting in the field.

The competition is certainly intense at retail, but given the limited field inventory, dealers are able to move the inventory that they have on their lots without historical levels of discounting or really hardly much irrational levels of discounting present in the market.

From a profitability mix standpoint, I'll make a few comments and then ask Bryan to weigh in as well.

I think we're still in a period where we have to be careful to isolate any particular quarter and say that, that is the number or the trend for our future going forward.

A couple of comments.

One is we are -- we've worked hard for several years here at the company to change the trajectory of profitability yield for this organization through continuous improvement, through the development of innovative products and through the acquisition of accretive, profitable brands and companies into the portfolio.

The supply chain environment particularly is so dynamic right now that every individual quarter tends to, in hindsight, have its own flavor on mix of products as dictated mostly by component constraints within the production planning process.

And so you saw this quarter, most apparently in our Motorized segment, our Motorized segment has almost twice the operating income yield today than it did back in 2016.

Yet it obviously was less profitable in Q3 than we had shown you in Q2.

Probably still one of the top 2 or 3 motorized quarters in terms of profitability in recent company history.

But the impact in Q3 to that profitability was largely associated with lower volume and mix, almost solely related to component constraints in terms of building what we desire to build.

And so to Bryan's comments in his script, we are confident that we have structurally changed the level of profitability at this company and particularly, in the Motorized segment, but we still have noise to manage through in future quarters, so long as the supply chain inconsistencies remains something that we have to navigate.

Yes, I'd just add a couple of comments for you there, Scott.

First, I'll point out that Q2 was an all-time record and Q3 would have been an all-time record, save for Q2, so let's call it, second place.

I'll let Steve audit my history there, but I'm almost certain that Q2 would have been a -- was in second place there.

So still a very strong quarter.

The inflation, we are seeing inflation, as I think all industries are.

The timing with which we offset that with pricing, some of the price protection that we afford our dealers on retail sold units delayed some of the pricing actions that we took to offset that inflation.

But over time, it's our intention of using our playbook, I'll call it, of cost savings initiatives, working with our vendors and then pricing to make sure that we're offsetting inflation.

And we still feel confident in our ability to do so.

Historically, we've commented about the supply chain inconsistencies impacting our balance sheet but not impacting our P&L.

I think we saw a little bit more impact in Q3 as well from some of those supply chain inconsistencies and the labor productivity impacts that, that has, and as Mike noted, particularly in the Motorhome business.

So a little bit more P&L impact in Q3 versus what we saw in Q2 and Q1 from supply chain.

So those are the additional comments I'd add there.

All right.

And then just one quick last follow-up, just on the Motorized segment.

You guys have made tremendous progress there.

If you were to strip out or assuming that the -- some of the supply chain issues kind of work themselves out, just what's the next level or the next approach for any meaningful improvements in profitability there?

Or has everything mostly been attacked at this point?

Scott, this is Mike.

We believe that there continues to be profitability runway in our company in almost every business and brand.

And we won't get into the strategic levers that we're in the midst of or attempting to pull in order to produce that profitability.

But the Motorized segment, while as I mentioned, structurally has improved materially, and we are -- we will not be complacent in resting that, that will just be guaranteed to happen, the #1 factor, I believe, in sustaining and growing profitability in this company going forward is innovation and the ability to deliver differentiated value products to the market that our competitors cannot quickly replicate, or even with IP, replicate at all potentially in the future and have the ability through those innovative products to get pricing and value in the market that produces higher levels of margin.

So that to me is the #1 driver.

There will continue to be extraordinary efforts at our company on continuous improvement and lean, the rationalizing of our product lines.

Certainly, efficiencies will be pursued at every turn.

But I truly generatively believe, great companies produce margin.

And durable good -- great companies produce margin most effectively through the development of innovative great products.

Our next question comes from the line of Mike Swartz with Truist Securities.

Maybe I just want to start off with some of the supply chain constraints that you've talked about.

And maybe just give us a sense of where you're seeing some of the biggest constraints and maybe how they trended during the quarter.

Has anything gotten better here into June?

I guess the question I'm trying to decipher, trying to get down to, is what would your revenue have looked like during the quarter in an environment where there was kind of unconstrained or no capacity constraints, no supply chain issues?

Well, Mike, this is Mike.

Relative to your first question about the condition and health of the supply chain environment, this is a question, as you know, we've been discussing for some time now as -- after we started to recover from the pandemic shutdown.

My comment at this point is that the supply chain environment is stable in terms of its inconsistencies.

I would not classify it as getting better, and I would not classify it as getting worse.

It is consistently inconsistent, albeit I've been very intentional in complimenting our supply chain partners that the industry would not be producing north of 50,000 units on a monthly basis without the tremendous efforts of those suppliers and their teams to get us components on a daily basis.

But I cannot predict for you today when the supply chain will improve back to normal.

But I'm not also predicting that it is getting worse.

It just continues to be a daily, weekly, monthly, quarterly challenge now present in our business, and we work with suppliers across the categories where those availability constraints come up.

So that's the answer ultimately to that.

Your second question, again, was?

What would sales have been if there were no...

Yes.

I don't think we'll comment specifically on the amount of sales that we missed in terms of sort of relative or theoretical maximum capacity production.

I can tell you, it's at a minimum 8 figures, but I don't think we'll comment specifically on how much capacity was left on the table based on missing supply chain constraints.

That's been the case now for probably 4 consecutive quarters and will remain the case probably for the next several quarters that we will not reach our max capacity because the supply chain just does not allow us to do so.

And Mike, one additional perspective I'll throw on related to your first question, which was kind of the mix of components.

I think as everyone on the call here will appreciate, we saw some episodic, I'll call them, disruptions, related to the freeze across the South earlier in the year and then also the Suez Canal episode, which caused the global logistics challenges.

Those episodic issues produced acute challenges, I'll say, across certain components.

And I think over time, those will start to alleviate from those episodic challenges.

But we'll continue to have some other broader-based constraints that we'll continue to fight as Mike was just referring to.

So some are episodic, some are more just supply not keeping up with the broad industrial demand.

Our next question comes from the line of Fred Wightman with Wolfe Research.

Mike, I was wondering if you could just dig into the retail forecasting commentary that you made.

It looks like there's a pretty big deceleration on both the 1- and 2-year basis implied for the rest of the fiscal year.

Is there anything that you're seeing in the marketplace that's actually making you more cautious?

Or is there just a general conservatism baked into those forecasts?

And I guess just at a high level, can you sort of put the retail performance over the past few months into context with how you thought that would trend when we started this year?

Well, the retail performance year-to-date versus where we started our fiscal year and even this calendar year has been better than we thought.

Back to the first question asked this morning about our inability to continue to improve field inventory levels, part of that challenge has been the performance of retail at a higher level than I think most of us in the industry thought was possible.

We've been stating very directly that we believe there will be some challenging comparative periods for retail in the summer and early fall months of 2021 versus 2020.

And even though consumer interest and engagement remains very strong, that the number comparisons from a percentage standpoint will be challenging to maintain in positive territory as we go through the summer and early fall months.

Now that is yet to be seen.

We certainly have access to information on a more timely basis than you all can get it from SSI and that was baked in certainly to the retail forecast we gave you.

We would rather be conservative with the retail forecast we gave you than Pollyannish or overly optimistic.

And as I indicated in my earlier comments, I'm certainly hopeful that both retail and shipment levels can exceed the projections that we gave you today.

But yes, we will be running into some comparative periods, which from an optics standpoint, will look like the industry is decelerating.

I will tell you, if you talk to 100 dealers, 98 to 99 of those dealers will not indicate to you today that retail interest and levels are slowing in any meaningful or material way, certainly from a historical basis, but we just saw unprecedented record foot traffic in retail last summer, and it will be difficult to comp positively against those.

But we are, as I said, extremely long and bullish on the impacts of elevated retail for the last 15, 16 months and forward for future years as well.

There are significant upgrades by existing and first-time buyers.

There are record levels of camping reservations and rentals and peer-to-peer sharing activity going on.

Our lead generation tools and websites continue to be very active with people looking for products, and we anticipate that we will have a robust retail environment on the RV and marine markets well into 2022.

Perfect.

And just on the Motorized supply chain, past few quarters, you've specifically called out Newmar as a big headache.

Can you sort of touch on where the supply chain is for Newmar specifically?

And where the sort of path forward for that is?

Yes, the Newmar team is working extremely diligently with the component availability they have to get product out the door.

I would suggest that Q3 was slightly improved for Newmar over Q2 from an availability and a product shipment flow standpoint.

We probably saw more pressure on Winnebago-branded Motorhome product shipments in Q3 than we had previously in prior quarters due to supply chain constraints there.

So relative to Newmar, we continue to work through some of the challenges there.

They do impact that business a little bit more inordinately than some of the other businesses, but that situation is improving.

We've put some specific resources and foot soldiers on the ground there to attack that issue aggressively.

But we've also seen a rise in the inconsistency of availability for some critical components on the Winnebago Motorhome side as well.

Again, none of this, we believe, is structural.

We believe it continues to just be a part of the challenge of getting raw material at the right time, dealing with shipments, both inside the country, but on the seas with some of the container and shipping issues.

And so we will continue to battle and do everything possible to continue to hold our shipment and retail share in that segment.

Our next question comes from the line of Bret Jordan with Jefferies.

On the retail commentary, are you seeing much, I guess, change from the long-term average as far as the buyer mix?

I think it seemed last year skewed a bit to new buyers to the RV space.

Are we seeing more of a trade-up year this year in what you see?

Anecdotally, Bret, I would suggest that this year's mix is a little lighter on first-time buyers and family buyers than it was last year.

And we are seeing a little bit higher mix of existing customer upgrades and maybe a broader mix of more diverse users coming into the market as well.

The very positive news is that the most significant activity we are seeing on retail is relative to the Millennial segment and the Gen X segment.

And so that bodes well for a generational turn that we need to make anyway as an industry in transitioning the buying power for RVs from the Baby Boomers and ultimately to the Millennials and someday to Gen X, and we are beginning to see that transition.

So yes, we -- as I indicated with some of my camping comments earlier, the number of new families engaging in the outdoors is probably a little less this year than it was last year.

Interest is very strong, but -- and first-time buyer percentage historically is still very high, but we probably have a little bit more balanced mix this year with upgrades.

Again, the challenge becomes -- is the product that, that person is looking for, either a new buyer or an existing upgrade buyer, is that product available at the time and price that they're looking for.

And that continues to probably be a constraint to what retail could be, if we had a full pipeline in the field.

Okay.

And then a quick question on Marine.

We didn't talk much about Chris-Craft, but sort of how does that supply chain challenge stack up versus RV?

And I guess, have you just say recreational marine interest is equal, greater or less than the RV buyer incentive?

I would use the word similar from a macro perspective in terms of consumer interest on marine versus RV.

As you're well aware, we play in a certain high segment sector with the Chris-Craft brand.

I will tell you that the challenges are different in terms of categories, i.e., outboard engines has probably been one of the larger constraints that the industry has been -- the marine industry has been battling here in recent months.

And all OEMs are working with suppliers like Mercury and Yamaha to garner as many engines as they possibly can.

But there are similar constraints on materials and different kinds of components as you're seeing on the RV side.

I'm sure it varies by type of boat and by OEM.

Our Chris-Craft backlog is very healthy.

Our domestic retail is as high as it's ever been at Chris-Craft.

That business has been impacted negatively due to the retaliatory tariffs for geographies like Mexico, Canada and Europe.

And we are hopeful that at some point, the current administration will work with those countries and regions to try to reduce or eliminate the retaliatory tariffs that have negatively impacted the marine export market for U.S.-based manufacturers.

But as I indicated in my closing comments on capital investment, we are putting capital into the Chris-Craft business for a capacity increase, and we should see that benefit within the next probably 12 to 15 months within that business.

So we are that optimistic about that brand's future that we are adding more space down in Sarasota for that brand.

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

First on the dealer front, I've seen a lot of headlines recently about Camping World making a lot of acquisitions and growing.

I was just curious how -- what kind of impact is that for Winnebago?

Is that really favorable, a nonissue?

Or is there a point where a dealer could get too big?

David, this is Mike.

We're seeing an increase in dealer consolidation overall, not just with the Camping World's significant activity in recent months, including an announcement in the last 24 hours on their expansion in Ohio.

But we are seeing other larger dealer groups expanding pretty aggressively across the country.

I guess the net positive or negative of dealer consolidation for an OEM like us is an it depends answer.

It really depends on who they acquired, the health of the business they acquire and the general health of the relationship between ourselves and that in that dealer group.

We tend to take the philosophy that our brands are unique.

They're highly valued premium brands that people look to step up into and stay with.

And that if we continue to serve all of the dealers with great product, great service, good support that no matter which dealer body grows or which dealer owns a particular location, that our brands are in good standing in most cases to be considered by all of the dealer groups that are growing.

So I guess we view consolidation more as a reality and not a negative.

And we've seen our market share across our brands continue to increase in an upward direction, despite significant consolidation activity over the last 5 years.

So our teams are certainly not viewing it as a headwind to their growth in the future.

Okay.

And on mix, particularly specific to Newmar, with the stock market having done so well in the past year, is that another favorable macro variables in some cases?

Is that causing maybe some customers who are buying Newmar who perhaps, pre-pandemic, would not have bought an RV at all?

Or if they did, they would have bought either a Winnebago brand or perhaps from Forest River or Thor?

That's an interesting question, and I'm not sure we have anything factual to substantiate a great answer to that question other than Newmar's retail activity, despite very low field inventory because in part of some of the production constraints we've talked to in this call, their retail activity has been strong on a longer-range basis, so 3-, 6-month look.

And so we are not seeing any decline in interest in the Newmar brand certainly.

And it's quite possible because of the wealth effect or the relative health of the equity market that Newmar stands to be favored in terms of people considering a second home in the form of an RV.

But I can't tell you specifically how many consumers that have bought a Newmar in the last 6 to 9 months or have a retail deposit for one that they're waiting for, have come in solely based on the health of their stock portfolio.

But we certainly have long stated that the wealth effect and the health of the equity market overall, we believe, is a tailwind in a positive sense for a consumer discretionary segment like ours, especially where the average price, in the case of Newmar, is well into the $200,000, $300,000-plus range for most of their coaches.

Okay.

And on the tax -- likely tax changes coming in the U.S. under the Biden administration, can you give any preliminary thoughts on what the sensitivity in your tax rate would be for, say, every 100 bps increase in the federal statutory rate?

Yes.

I think, David, I would just translate it into any kind of legislation that is passed at the federal level would translate into a one-for-one increase in the tax rate.

We're at 21% today and the overall effective rate is in that 23% to 24% range.

I wouldn't see it being much different than a one-for-one tickle to 25%, for example, that would represent a 4-point increase.

Our next question comes from the line of Tristan Thomas-Martin with BMO Capital Markets.

Two questions.

RV industry has seen a lot of supplier component recalls in June.

So what are you doing to kind of deal with that?

And then just an overall question on the build quality you're seeing from yourself and just maybe some of your competitors.

And then one more question, how do you protect market share moving forward?

Towables, I think you're seeing a lot more entrants than Class B as obviously a very hot space.

So what's your plan there?

Tristan, this is Mike.

I'll start with product quality first.

We feel confident that our operational processes remain disciplined enough, even with out-of-process work, because of supply chain availability challenges at times that we are delivering and continue to deliver high-quality components to our dealers.

We are very committed to not shipping our dealers incomplete product and asking them to finish assembly on site.

That's a philosophy that we are not a fan of.

We will ship them complete, high-quality units as soon as we are able to.

And even though we are completing some of those units offline with processes that are abnormal, we still believe that the general quality of our products is in very good shape.

And even though there's a tail on this topic in terms of warranty claims, we are not seeing any significant signs from a warranty standpoint, that our overall product quality has decreased in any significant way across our portfolio in the last year.

In terms of monitoring supplier quality, we have business processes in -- both in terms of working with the suppliers, so that their operations are as strong as and effective as possible.

And we also have some processes inside to make sure that the components we do get from our suppliers are generally built to spec and performing functionally to the degree that we need.

As you are well aware, there are thousands of components in the products that we make.

And unfortunately, it is not uncommon at times for a quality issue to slip into our products based on a component that we buy externally.

And we work expeditiously and diligently with our engineering and manufacturing and product safety teams to make sure that when we do have an issue that we're addressing it quickly, working with the supplier as needed.

And if it is a safety issue, we work very closely with the government agencies in a transparent fashion to manage any recalls in the business.

So from a market share standpoint, this is -- the RV industry and the marine industry have always been extremely competitive, even with OEM consolidation.

The RV industry has a relatively low barrier to entry.

You do see start-ups continuously in the recreational vehicle industry.

We have been the beneficiary with Grand Design of acquiring one of those start-ups, almost 5 years ago now.

That has turned out to be a fantastic addition to our portfolio.

But you do continue to see start-ups and our teams continue to work to our playbook to execute our strategies and maintain our strengths in light of increased or new competition.

We're very pleased with our Towables market share now in the 10%-plus range.

But we are a distant third against the 2 larger competitors in the Towables arena.

And we believe we have significant runway even with new competition for Winnebago Industries and our 2 brands, Grand Design and Winnebago in Towables, to make significant market share headway there.

Class B has undoubtedly become more competitive in the last 2 years.

We've been signaling that for some time now.

Back in 2015, this company had 35% share of the Class B market.

It rose arguably as high as almost 50% due to some great product we introduced, but also the demise of a competitor in North America, where we were a beneficiary of some of that volume shifting.

And with increased competition, and we have been very honest about this, it's likely that our share will probably be less in the future than it has been in the last couple of years.

But a lesser percentage of a market segment that's growing significantly will equate still to a growing, healthy, profitable business for Winnebago Industries.

We have significant product development plans on the Class B category that the market has not seen yet.

And so we intend to be as competitive as possible even with that becoming more crowded.

So the math from a market share standpoint there may be challenging, but we can assure you that we are confident that we can continue to grow that category in terms of units and dollars and sustain appropriate levels of profitability in that segment.

Our next question comes from the line of Shawn Collins with Citigroup.

Great.

My question is on your backlog.

Did this quarter's backlog number surprise you, given it's staggering in size?

I think it came in at $3.7 billion versus clearly a sub-$1 billion range in 2019 and before.

And can you talk about how firm the backlog commitment is and possibly describe the arrangement between you and the dealer community?

Yes.

Thanks, Shawn.

The first thing we should note is that backlogs are most likely defined or measured differently by some of the OEMs that you engage.

There's probably no common definition of what a backlog is.

We try to take a pretty strict conservative view that it is a committed confirmed order from the dealer that we put into our production schedule and essentially base the ordering of components and supply chain elements to that schedule.

We tend to like to see the backlog be mostly focused on the next 6 months, albeit, obviously, mathematically right now, we have a backlog that is arguably almost a year's worth of demand as stated from our dealers.

We have a process where we ask the sales members of each of our teams to work with our dealers to cleanse the backlog, to walk through the orders that they have given us and to identify which of those orders is no longer needed.

And if they're no longer needed or the dealer has less commitment to that, then we want to remove those orders from the backlog.

And that is a process that we try to do regularly in terms of cleansing the backlog.

As we've talked before, there's also a percentage of the backlog that has a retail sold element to it, where the dealer has taken a deposit on that.

So were we surprised with the backlog increasing?

The answer to that is no because the retail environment has been very robust.

Our dealers have not seen as much inventory come in as they would have liked to.

And their confidence in the future remains strong.

Is there the risk that there is some percentage of that backlog that as time evolves and market conditions evolve, could ultimately not be delivered?

I would say the answer to that is yes as well.

But I don't view that as a large percentage.

I would say if you sat -- we sat down dealer by dealer and said, how much of this inventory do you need that you're ordering, they wouldn't say a high majority of it.

And that's a combination of time, anticipated strong retail conditions and the fact that field inventory conditions generally, on the Towable side, are still 20% to 30% lower than desired.

And on the Motorized side are probably 40% to 50% lower than desired.

So lots of factors, obviously, there that I just described, but we take the backlog and we assign it every unit to a production slot and order supply chain components to make that unit.

And so we take the backlog very seriously because we do not want to produce open units that dealers do not want.

And so that is the process that we have and we are not pleased that the backlog delivery time is as long as it is projected to be.

And that is why you're hearing us talk about some of the capacity expansion investments that we're making in our business that should come online in the next probably 9 to 18 months to help us start to work that down.

But we believe it will take most likely through at least calendar year 2022 to get the field inventory in the RV market to a place where dealers are more comfortable.

Our next question comes from the line of James Hardiman with Wedbush Securities.

So just a quick clarification, and I hate to harp on the retail question and the outlook.

I think we all get that the math makes it difficult to comp positively versus the record levels from last summer.

We can all see the math.

What we can't see is sort of what's going on right now.

And Mike, I think you made a comment that, that has yet to be seen.

So I guess, I don't know if you want to answer this, but let me just ask the question directly.

Where do you think June is trending versus a year ago for you or the industry from a retail perspective?

Well, I appreciate the question.

We won't comment on retail as it's happening sort of live and in person, but I can tell you that the latest retail from April SSI had an extremely high comp number based on the comp versus the prior period.

We expect that number to gradually decrease, beginning with May SSI retail into June and July and August, just naturally based on the strong retail that we saw a year ago.

And remember, a year ago, we had more field inventory in the field to sell off of during the summer, certainly less than we would have liked because of some of the manufacturing shutdowns.

And that field inventory level is potentially similar or even worse in some locations than it was a year ago.

So that's going to have a negative impact on retail.

But again, historically, that 575,000 unit retail estimate that Craig Kennison talked about in his first question during the session, whatever that number is, it's very healthy historically, and we believe that retail conditions will continue to be robust into calendar year 2022.

The challenge we recognize is that the year-over-year optics will become cloudy here at some point, but that does not mean that consumers are not engaged in shopping.

It's just going to -- it's -- we're just in a couple of year crazy period that is difficult at times to describe with any historical sanity.

But we would not be investing significant capital into capacity expansion if we did not believe retail and wholesale shipments were sustainable for the long term.

Got it.

And then you made a comment in the prepared remarks about lead times and price increases and whether they may or may not be affecting consumer demand.

I guess, has there been an uptick in consumers walking away based on those lead times?

Obviously, some people are going to walk away, and that's been the case, I think, all along.

But has there been an uptick?

And how do you generally gauge the elasticity of demand and consumers' willingness to absorb pricing here?

The elasticity of the demand is measured primarily by listening to our dealers very closely, and hand-in-hand, understanding what they're seeing on a daily business in their dealerships.

And yes, we have heard some cases as pricing increases have become more frequent and at a higher level here in the last 6 months, that some consumers have stated that the pricing is getting a little rich for them.

That is a significantly low percentage of the retail interest or even the retail sold deposits.

We just celebrated a dealer relationship with our company last Friday.

I have the privilege and pleasure of sitting down with the Hall of Fame Dealer Principal over lunch for more than an hour.

And he said, "Listen, for every one customer that says the price has become a little too rich or the time is too long," he says, "I have another 50 customers that are standing right behind that gentleman or lady to take that order if they decline." So the net positive environment is still very healthy, but we are watching carefully the potential impact of pricing due to the cost inflation and the moves we're taking.

So that if we do start to see a step down in consumer interest because of pricing, that we manage that effectively.

We tend to try to cost to market first, but cognizant -- or price to market, but cognizant also of the cost, obviously, that we're seeing in our business to maintain appropriate margins.

We're also seeing a dealer environment, as I described earlier, that is what I would still call a full margin environment.

Now you are seeing some dealers at times getting close to MSRP for retail units fill.

And I think the other indicator of when pricing will potentially turn into a consumer headwind will -- when we start to see discounting come back into the retail arena on an individual dealer basis or a dealer-versus-dealer basis.

And we're just not seeing a tremendous amount of discounting quite yet.

Thank you.

I'm showing no further questions in the queue.

I would now like to turn the call back over to Mr. Steve Stuber for closing remarks.

Great.

Thanks, Towanda.

As Mike mentioned, we appreciate your time and interest in Winnebago Industries.

Thank you for joining us today, and we hope everyone is enjoying their summer in the outdoors, of course.

Have a great day.

Ladies and gentlemen, this concludes today's conference call.

Thank you for your participation.

You may now disconnect.

Everyone, have a wonderful day.