Winnebago Industries, Inc. (WGO) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Winnebago Industries Second Quarter Fiscal 2015 Earnings Results Conference Call. My name is Shelley and I will be your operator for today. At this time, all participants are in a listen-only mode and later we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Sheila Davis, Public Relations and Investor Relations Manager, please proceed.

Thank you, Shelley. Good morning and welcome to Winnebago Industries' conference call to review the company's results for the second quarter of fiscal 2015 ended February 28, 2015. Conducting the call today are Randy Potts, Chairman of the Board, Chief Executive Officer and President; and Sarah Nielson, Vice President, Chief Financial Officer. The news release with our second quarter earnings results was posted on our website earlier this morning. 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 at approximately 1 PM Central Time today. If you have any questions about accessing any of this information, please call our Investor Relations department at 641-585-6803 following the call today. This presentation may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements are inherently uncertain. A number of factors could cause actual results to differ materially from these statements. These factors are identified in our filings with the Securities and Exchange Commission over the last 12 months, copies of which are available from the SEC or from the company upon request. I'll turn the call now over to Randy Potts. Randy?

Thanks, Sheila. We are pleased to announce that year-over-year fiscal ’15 second quarter revenues and gross profit grew while we also saw an improvement in gross margin. We achieved these results despite still working through the labor-related constraints and challenges that we discussed last quarter. To that end, I can report this morning that we are making progress towards mitigating our labor-related challenges which should improve our capacity in the future. First, we are working on a plan to ensure we are competitive in the local North Iowa job market. Second, we assigned a purchase agreement for a facility outside of our current labor market which draws upon a larger labor pool. We plan to employ about 70 people, which is approximately 5% of our Forest City workforce in this new facility. While this perspective facility is essentially moved and ready, there are several factors including hiring, relocation and others which will be addressed as we move forward. We will provide more information on the progress that we are making on this facility during our next quarterly call. Moving on to an update on our products, during the second quarter, we achieved number one status for our Winnebago Touring Coach line which is retailed more than any other Class B motorhome model in North America. Additionally, the Winnebago Touring Coach line achieved nearly 84% volume growth last calendar year with 551 units retail in the U.S. which is just over 25% retail market share compared to 17% market share in 2013. Moreover, we are very proud that our retro-styled Brave and Tribute have been named RVBusiness 2015 'RV of the Year'. These products were unveiled during last year’s Dealer Days event and were the culmination of Winnebago’s strong team work and innovation to achieve a model that paid tribute to the design of our original motorhomes, but was also very modern and innovative. We believe these are just a few of the reasons we continue to see increased demand from dealers in terms of their desire to stock more Winnebago products and from consumers as evidenced by favorable retail registration statistics. In our fiscal ’15 second quarter, motorhome retail registrations increased 18% year-over-year and 30% on a rolling 12-month basis driven by strong demand across several product categories. This strong retail demand contributed to an increase in Winnebago’s motorhome retail market share of 210 basis points for calendar year ’14. Our fiscal ’15 second quarter was also the fifth consecutive quarter of profitability in our Towables Group generating positive operating income and impressive top line performance driven by sales growth of nearly 12%. We are very pleased with the progress of our Towables operation and therefore have decided to purchase the currently least Towables assembly facilities in Middlebury, Indiana. This purchase further exemplifies our commitment to growing our market share within this segment and underscores the confidence we have in our ability to execute in the long-term. Additionally, during the second quarter, we began to make strategic investments in the areas of procurement and sourcing of materials as well as information technologies through the implementation of an ERP system. While we experienced cost related to these projects during the quarter and expect to incur future expenses associated with these initiatives until their conclusion, we believe they will provide the company with long-term benefits and future cost savings upon completion. Last, I’d like to add that we are very enthusiastic about our forthcoming Dealer Days on April 08 and April 09 in Las Vegas. At this company sponsored event, we’ll have the opportunity to meet with hundreds of our dealer partners and showcase several new models and exciting product enhancements. In closing, we are encouraged by our results this quarter as well as our progress on the labor front. We also look forward to capitalizing on the healthy demand that we continue to see in the market. Now, Sarah will review some of our other key business highlights in addition to the financials.

Thank you, Randy. During the fiscal 2015 second quarter, consolidated net revenues grew 2.5% in large part due to an increase in motorized unit shipments. Our Towables Group also contributed to the overall increase in sales with unit and ASP growth. When looking at our second quarter motorized ASPs, we saw increases in the average selling price of every single product segment due to product mix and pricing as compared to last year. Specifically, Class A gas was up nearly 4% to $97,525, Class C diesel was up nearly 18% to $206,343, Class C was up almost 10% to $78,112 and Class B was up nearly 12% to $76,868. In summary, however, total motorized ASPs was $100,213 essentially flat to the prior year due to a higher concentration of Class B and C products that both had ASPs of under $80,000. Moving over to our Towable product, Travel trailer ASP was $21,002 up over 8% primarily attributable to the introduction of the Spyder, our Toy Hauler product which carries an ASP that’s higher. Our fifth wheel ASP was $50,600, an increase of nearly 19% primarily due to more sales of higher end options models. In aggregate, Towable ASP was $25,748 and up almost 8% over the prior year. In the second quarter, our dealer inventory increased 22% compared to last year and stood at 4,778 units as of February 28, 2015. On a sequential basis, dealer inventory increased 14% when compared to the end of the first quarter. Compared to both periods, higher dealer inventory reflects in part the strong demand for our new product offerings as many of our dealers continue to increase their stock of these products. Specifically, increased stock of Winnebago’s new products accounted for 6 percentage points of the year-over-year dealer inventory increase. Notably, dealer inventory of our Class B motorhomes has increased significantly in the past year due to the strong retail demand of our product which was up over 100% on a trailing 12 month basis. Given the solid consumer demand for these products, we anticipate that they will continue to generate increased retail demand. Also, as we’ve mentioned before, higher dealer inventory levels are attributable to our efforts to ensure that all of our product offerings are well represented across our dealer network. To that end, over the past 12 months, we have expanded our product line points of distribution and the physical dealer locations by 4% and 7.5% respectively. Thus our dealers are stocked with fresh inventory for the upcoming spring retail selling season. We believe all of these factors point to a positive outlook by dealers who have grown in confidence towards the industry and the consumer. Moving to backlog, motorized bookings grew nearly 59% compared to the year ago quarter. This was the second consecutive sequential increase in our motorized backlog which totaled $2,275, a 7% from the level reported at the end of the first quarter. Backlog decreased on a year-over-year basis largely due to our increased production rates over the past year which have allowed us to satisfy demand particularly for some of our newer products. Further, Class A gas backlog was elevated in the fiscal 2014 second quarter due to an inadequate supply of chassis from Ford. Over the past four quarters, we have had an adequate supply of chassis which has allowed us to fulfill our backlog on a timelier basis. Year-over-year, fiscal 2015 second quarter gross margin improved 30 basis points despite labor-related constraints and the associated expenses that persisted during the second quarter. As we noted in our earnings release, the increase primarily reflects improved product mix, higher absorption of fixed costs and the absence of the weather-related expenses experienced in the last year’s second quarter. We believe margins will continue to improve as we resolve our remaining labor-related constraints and their associated expenses. Also, we are pleased to announce that we have substantially completed the upgrade to our new $7 million electro-deposition or e-coat paint system. This system is unique to Winnebago providing us a competitive quality advantage with protection from corrosion which extends the life of our motorhomes. We expect to benefit from this new process as we continue to ramp the new system in coming months. Compared to last year, operating expenses increased in the fiscal 2015 second quarter mainly attributable to higher G&A expenses of $2.5 million, a majority of which are associated with the two important strategic initiatives that commenced during the quarter and that we discussed on our December conference call. The first strategic initiative relates to the execution of an ERP system implementation, which will replace our in-house developed financial and operation legacy systems and provide better support for our changing business needs and plans for future growth. We believe that this project will deliver long-term cost savings through supply chain management optimization and operational improvements once completed in addition to a reduction in system maintenance, internal development and support cost. Notably it is our view that the cost to support our legacy systems would greatly increase in future years due to the outdated programming language used if we did not migrate to a new system. Our current estimate for completion of this project is $12 million to $16 million over a three year time frame which includes software, external implementation of systems and increased internal staffing directly related to this initiative. We currently estimate that approximately 40% of the total cost will be immediately expensed over the life of the project and 60% will be capitalized. As a result, we expect up to $3 million of incremental G&A expense in fiscal 2015, of which $652,000 was incurred in our second fiscal quarter. The second initiative is a strategic sourcing project with the objective of obtaining long-term material cost savings through standardizing our purchasing processes, optimizing our supplier relationships and improving our current sourcing methodology. We have engaged external support with deep domain expertise to help us conduct this project and as a result we expect to incur up to $2.8 million in G&A expense for this assistance of which $827,000 was incurred in the second quarter. We expect to incur approximately $700,000 of incremental G&A expense for the remainder of fiscal 2015 and the balance in fiscal 2016. The project is planned to be completed in June of 2016 based on current internal staffing support. Once fully implemented, we anticipate this investment will provide gross margin expansion of 30 to 50 basis points. Rounding out higher G&A expenses for the quarter were increased legal cost of approximately $500,000 most of which related to protecting the company’s brand name in Australia as well as higher equipment maintenance cost. Looking forward, we expect to incur more normalized levels of legal and equipment maintenance cost. Operating cash flow in the second quarter was affected by higher receivables of approximately $13 million. At the end of the second quarter, we also had elevated inventory levels partly the result of the rental build season. In the second half of fiscal 2015, we expect to generate positive cash flow through the continued strength of our operating results, as well as favorable changes in working capital. Moving to rentals, I’ll briefly follow up on last year’s Apollo transaction which is a win-win for both us and Apollo. In the second quarter, our investments in operating leases and their operating leased repurchase obligation both decreased to zero reflecting the sale of units by Apollo directly into the used market and the resulting release of us from our obligation for the repurchase. Based on the success of this rental transaction, we received an order of similar size from Apollo for the rental season and we are currently working on production for their units in the 2015 fleet. On the Towables front, we are extremely encouraged with the group’s strong performance and are pleased to announce our decision to purchase the currently leased Towables assembly facilities in Middlebury, Indiana for approximately $5.4 million. As Randy pointed out, the purchase demonstrates our commitment to growing Winnebago’s market share within Towables while also providing us with reduced facility operating cost as the projected annual depreciation expenses are less than the annual cost to lease the facility. This purchase is included in our planned capital expenditures of $15 million to $20 million for fiscal 2015. Finally, I like to reiterate that we are very positive on the long-term outlook for our motorized and total businesses and believe our company has opportunities for future growth which combined with our strategic initiatives underway should help us improve our margins and profitability. With that, please open the line for questions.

[Operator Instructions] And your first question comes from the line of Kathryn Thompson with Thompson Research Group. Please proceed.

Hi, thanks for taking my questions today, and also wanted in particular to say, Sheila, best of luck in retirement. We’ve very much enjoyed working with you over the years.

Thank you. That's very sweet.

First question is just a follow-up on ERP implementation, how much of the SG&A – you outlined $1.5 million from four different items in the earnings release today, but how much of the SG&A was impacted by the ERP implementation and how should we think about modeling that on a go-forward basis?

Let’s frame it in the entire IT monetization cost, not just ERP.

Okay.

Sure, Kathryn. Well, first I clarify the $1.5 million is specifically related to the two projects. So when total G&A went up $2.5 million from an ERP specific perspective, we had $652,000 of expense in this quarter and we expect in total for the year, we are going to have $3 million. So less that $652,000 already incurred is the balance, estimated now between quarters three and four, we also incurred cost associated with the strategic sourcing project on that I touched upon and that was a little over $800,000 and then the remaining $1 million of increase primarily was a function of the legal expense, that’s up about $500,000 and then the equipment maintenance cost.

Okay.

The ERP is really the big piece of three legs of an IT monetization effort. So some of those costs are starting to tail off but they are still in there. So we don’t necessarily bring them to the front.

Okay. Last quarter, you talked a little bit about just a product quality with a particular supplier or particular part. Any update on that from prior quarter, and are you mostly through that issue?

Yeah. The particular issues that were extraordinarily painful in the first quarter have subsided. But in the nature of the RV business and the type of supply base we have, we are always challenged with some type of supply issues whether it’s just lack of supply or quality issues with particular components. And the second quarter saw those types of issues on a more normal basis. We are always dealing with some of that we are today as we speak, but nothing on the scale of what we saw in the first quarter.

Okay, great. And I think I know the answer to this, but just to be clear based on your prepared comments, the current quarter numbers don't include any of the Class C rentals or those associated with Apollo Group. You will only start working on those in the upcoming quarters?

Some of those were in work-in-process and finished goods but not in revenues.

Right. Yeah, we’ve been starting to build to be prepared to execute in the next few months, but that’s a good question and you’re right that that’s perspective for us.

Okay. And then finally, could you give a little bit more color on how performances have been at retail shows in early 2015? In particular focusing in on Class As and Class A gas because that has been underperformed a little bit. And just would be interested to hear how acceptance has been of new products. Thank you very much.

The shows have gone very well, Kathryn. Class A gas is really, we’ve seen a little dip in our retail performance but wholesale remains very robust. I don’t see any specific trends there. Our Vista Sunstar line is very robust. I think maybe more notable is really the softening of the diesel-pusher market. When it comes to unit volume, a slight dip in diesel pushers has a lot more impact on revenue and margin wise than gas As. But we don’t see any issues at all with the performance of our gas As at this point.

Okay. Perfect.

That helped?

Alright. Thank you for taking my question today and Sheila best of luck. Thank you.

Thank you.

Thanks, Kathryn.

Your next question comes from the line of Craig Kennison with Robert W. Baird and Company. Please proceed.

Good morning. Thanks for taking my questions as well. Sarah, could I ask you to repeat the metrics you cited regarding your dealer penetration and growth in inventory at the dealer level?

Sure. I wanted to really highlight it into three key reasons of the increase. Part of it is a function of the new products sell into the marketplace and so when you look at on a year-over-year basis, about 6% of the growth is a function of this just the new products at the dealers that wouldn’t have been there a year ago. I did highlight in particular the B, one of that is a fairly new product offering, one we’ve had out in the marketplace for a while because that category in itself, when you at dealer inventory year-over-year drawing to the mix into the pads, that Class B segment accounted for a significant portion of that, and that has been really a story of retail growth when we look at that category in and of itself. Also from the standpoint of the distribution efforts, it’s both on the brand distribution points ensuring that we have fair and adequate representation across all of our products and so year-over-year that’s approximately a 4% increase of dealer distribution products, second quarter to second quarter. And then from a physical standpoint, we still have more doors from that time parameter and that’s up approximately 7.5%.

Thank you. So it would seem that you are gaining share of distribution. Are you seeing that translate into share of retail yet or is it too soon to see that manifest itself?

I definitely would link that in part to the retail registration growth that has transpired inside of the quarter specifically up 18%. On a year-over-year basis, we are looking at a growth of 30%. There is more factors in that full timeframe, part of the rental increase in our business is in that 12 month number. But I do believe that that’s helping the retail metrics for us inside of the quarter.

And would you say that some existing dealers are choosing to take on more lines because they would rather take it on themselves than may be allow some other dealer to take on that line?

I’m sure that there is that instance. I mean I think every situation is going to have a unique story but it depends on the geographic area and the size of the retail market and the opportunity that dealer sees.

Okay. Then shifting gears here just to demand, are you seeing any localized impact from the price of oil and also could you comment on trends in Canada given currency movements?

Yeah, we’ve been asked that question about oil a lot ever since the price of oil has fallen and I can’t say we can specifically link anything to that intuitively we think it will be very good news for our business. Our products consume oil based fuel and that should be a tailwind for us. Additionally, our products are driven to their destination so it helps delivery cost and lot of the components, the lot of the materials we use in the construction and the plastics, the manufacturing of steel I mean all involves oil, so I got to believe it’s providing a good base for the state of business. As far as Canada, winter is a very small market for RVs in Canada. So I think it’s too soon to tell what state of business will be going forward. We’ve got to wait until the fall happens, Craig, and if you look at January retails in Canada, they are so small. It’s hard to draw any conclusions from that.

That’s fair. And then, Sarah, with respect to the rental orders, would you expect them to be booked in Q3 like you did last year?

The timing of the deliveries will cost both Q3 and Q4 though there is one of the booked, they do define a number on that certain timeframes and there is one of those deliveries set to occur inside of June of our fourth fiscal quarter.

So from a modeling perspective, should we be concerned that some revenue that would have appeared last year in Q3 will be spread across Q3 and Q4 then?

Yeah, there will be a shift to some degree, we are still finalizing all the specifics and as we have more information to share, we’ll do our best to ensure that we communicate that to your point that you can understand how that will impact the performance between the two quarters.

Great. Let me just say, Sheila, it has been a pleasure to work with you as well. You’ve been just a great supporter of ours, and a great Investor Relations representative. We'll miss you.

Well, thank you.

Your next question comes from the line of Morris Ajzenman with Griffin Securities. Please proceed.

Good morning guys.

Hi, Morris.

Good morning.

Returning to the Class A diesel again, you touched on it before, but it's not difficult to do the math but year-over-year on a revenue basis is down $35 million. Does that definitely continue to be a difficult comparison going on the next handful of quarters the best you can foresee, or just help us understand how that plays out. Because clearly it has a material impact on the revenue generation and profitability now on a comparative basis.

Yeah, let me put three things out there, Morris, that might help paint the picture. Some of the comps are based against a year-ago when we were launching some new diesel-pusher products and our diesel-pusher business on top of the overall diesel-pusher business being more robust, we had launched a whole new product segment and we are getting a lot of business there really just kind of filling the channel. So that’s one of the comp, one thing notable to the comparison. Another is the general softening of the diesel-pusher market. I think industry wide that has softened and third, we have some holes to fill. We have lost some ground within the market, there is no denying that. We clearly understand that and we have strategies designed to address that going forward. Does that help?

Yeah, but again looking into the second half of this fiscal year, will continue to be difficult comparisons from your perspective for Class A diesel?

I don’t want to get into a guidance position, but this market moves pretty slowly, so…

Fair enough.

…one could reason that.

Okay. And one last question I guess maybe you Randy or Sarah, on bookings growth was very strong year-over-year, is that correct, up 59%?

Yes.

And then, the backlog, again being down year-over-year again is no longer short of the chassis. How should we read into this though? That booking growth – clearly you're churning out the orders much more quickly. But with that sort of booking growth, can we expect to see backlog starting to rise in the June quarters, or again do we have the chassis issue impacting third and fourth quarter over February of last year where the backlog was up – it's called exaggerated?

Yeah, notably in Class A gas line, on a year-ago you will see we have over 1,100 units in our backlog and we still were challenged as that related to having adequate supply and we since corrected that. So, when we look at what’s transpired over this last year and we have increased on our production rates on the rolling 12 months over 15% and we have now the capability that some more timely – deliver the product inside the quarter, but it is fair in the last six months that level of growth on production has really slowed. In the first half, we produced on average about 5% more products that we did a year ago, because of the labor challenges that we’ve touched upon in the last few quarters. So that’s really what our focus is. We have to have adequate resources or adequate facilities outside of this labor pool to help grow the business and with additional capacity in that matter, there is opportunities to see those orders book continue to grow as well.

Okay, thank you. And I'll toss my hat in the ring to Sheila, enjoy your retirement.

Thank you, Morris.

Your next question comes from the line of Mike Swartz with SunTrust Robinson Humphrey. Please proceed.

Hey, good morning everyone.

Good morning.

Good morning.

Hey, Randy, I just wanted to follow-up on the commentary on the diesel-pusher market and I guess as I had understood that market has been a little soft for a year or so, I mean are you saying that there has been incremental softness over the past, call it two or three months and how does inventory positions on that product line stand at dealers today?

I’m not sure I completely understand your first phrase of that question, by incremental softness you mean, year-over-year or what would the comparison be that you are looking for?

I guess [indiscernible] from the last two to three months is the way I should have phrased it.

I don’t have that specific comparison in front of me, Mike. We could sure follow-up with you as far as what the retail numbers are doing in diesel in that timeframe. We are dealing with it here in a more general perspective unless you have that Sarah, specifically last few months performance of diesel.

Yeah, I’d have to break that out separately, maybe to follow-up on your point though that there is a seasonality to diesel that’s a little bit different in certain geographic areas of the country and so there is opportunities inside the – falling into the winter to see strength in diesel performance in Florida or the Arizona and California areas. As it relates to some of the opportunities we feel we have, in regards to certain product segments that we don’t necessarily have product competing and where we see some of the volume on the upper end, we have made headway in that regard in the last year, but there is more steps that could be taken when we look at the success of some of the products in the marketplace. From the standpoint of dealer inventory, I think we have adequate amounts of dealer inventory. When you look at the growth of our inventory levels in the year-over-year comparison, diesel is actually slightly down to where we were a year-ago. So it hasn’t been a build-up of inventory at the dealerships for diesel. And on a calendar year basis, when you look at the stats for us specifically, we saw our Class A diesel market share grow 10 basis points for the calendar year ended 2014 to 2013 and so we slightly increased our piece of the pie for that year. We didn’t see that same dynamic in January, but that’s just one month. So…

Michael, I will say that if you look at the history of the diesel A body gas, A body mix in the industry, it varies overtime from diesels being, I am going to say typically in volume a little under. We have like a 40/60 split, we were at a point where diesel is – a few years ago actually got higher than gas which is a little unusual, and yeah I asked Sheila to pull the slide up and that is changing, that separation currently is 64% gas and 36% diesel. It was much closer few years ago. So, there is – and again you just don’t know where it is going to go from here. It does change. I did just get some information here that industry wide in 2014 diesel sales were flat in 15, January they are down 28% so there is a change going on, it’s hard to tell where it is going to go and when.

Okay, great. Thanks for the color on that. And second question I have is just on understanding some of these costs flowing through and some of the projects you have going on right now kind of hit to margins in the near-term. How should we think about just I guess the payback or the return on these projects as we lookout 12 months to 24 months, and I know there is quite a few projects you have, but maybe a little more granularity on when we should start to see some of the maybe margin benefits going forward?

For the one that we have highlighted the quantification and it’s probably – the nearest term would be strategic sourcing. We are currently looking to end that project about a year from now. If we can support it internally at a faster pace, we will, but current plans are that it’s going to take us out until next year in the June timeframe. And the objective there is 30 basis points to 50 basis points of margin improvement related to that concentrated effort. When you look at that ERP implementation that is one that is a longer project. We are currently planning that to be a three-year project. We have various phases and waves associated with that, so we have logically laid out what will be changed in which order and when. So, some of the benefits can start to happen inside that timeframe, but we still have the implementation spend associated with the project going on as well. First and foremost, we really need to make these investments so we will have the right tools to support our growth in the future. And we know that if we do nothing, the cost to support our legacy systems are going to continue to increase just because we are using outdated programming language, it’s hard to – once we have the key people here that were part of the programming leave the company to recruit folks to take their place is going to be a challenge and it’s not something that we face alone by any means. So there is a mitigation of really an escalation of cost in the future that’s part of the whole project as well. But we are looking to be able to work more smartly and free up some of the resources on a go-forward basis as we implement and have parts of the systems put into place. And that also is helpful from a labor standpoint because we don’t have infinite amount of people to recruit from in this area either. So, as soon as we have more defined metrics that we can share, we will. We started the project in January and there’s been a lot of work done, but so much more to do, so we are pretty early on into that engagement.

Okay, great. Thanks for all the color. And again, Sheila, congratulations and best of luck.

Thank you.

Your next question comes from the line of David Whiston with Morningstar. Please proceed.

Thanks. Good morning.

Good morning.

Good morning. First question on your e-coat system. Just curious, I don’t know if you can speak too much for the rest of the industry, but why hasn’t any motorhome maker done this before?

Most of our competitors source their fabricated steel parts externally and a lot of those suppliers use this or a similar process. We’ve determined and I guess long held that metal fabrication, supplying – the internal supply of those components is one of our strengths, one of our core competencies. And in fact when we were going to the transition of a few of these installations, we did outsource some of those fabricated metal components and it was a great expense to do that. So, that’s why we do it internally. And this system, this isn’t a new process to us. The fundamental process is one that we’ve had for over 30 years, but it was an installation done in the early 80s and it was just one of those bills that had come due and we’ve replaced it. This is something that we’ve talked about for 15 years. The day was going to come when we had to this and we’ve just put a lot of planning into it and really bit the bullet and this is the team that’s finally accomplished this. It is a big accomplishment, it’s a big expenditure, but logistically it’s also a very big accomplishment. There was a lot of thing that had to be done. So going forward, this system is going to serve the company for the next 25 years. It’s going to more efficient, it’s going to produce a better product with less labor, less energy consumption. So, it’s good to have it behind us. And it’s one of those bills that had to be paid.

Okay. That’s helpful. Moving onto the balance sheet, Sarah, you guys did tap your – it looks like you tapped your credit line in Q2 and repaid it all and your cash balance is getting low even though we are entering the key spring selling season. Do you think internally you can avoid tapping the revolver in Q3?

Well, you can see that we have a lot of working capital tied up at the end of February in inventory and receivables. And so, during Q2, they were small amounts, and a few different points in time that culminated into what you see in the cash flow statement, which – we’ve had that line of credit in place for working capital needs all along. So that’s the intended purpose of it. Inside the back half of fiscal 2015, we look that we have an opportunity to generate a lot of cash. I mean we flow through on the rental product that we built and advance for the Q3 deliveries. The timing of the receivables is a function of when we ship products inside of a quarter. And we definitely had a lot of volume of products shipped inside of – the latter part of the quarter, which does grow those receivables and we timely that they are collected in a very short time duration after shipment. So, I guess that gives you a little bit more color and insight on the liquidity near-term.

Okay, thanks. And last question, can I assume that subprime customers are pretty low portion of Winnebago’s business? I’m just trying to get some more color because there was a lot of discussion on the light vehicle side. I just want to see where that is on the motorhome side?

Let’s hope so.

When we look at the consumers that typically buy our product and it’s even I think a distinction between a Winnebago branded product in the marketplace and maybe some of the others. We generally have consumers that are fairly high of net worth or creditworthy. There is always that risk from a lending perspective that some of the leniency that were in place from part of recession kind of creep back in.

To be honest with you, I haven’t heard that word subprime in about three years. I don’t think that’s the case. We don’t lend the money, we don’t work with the retail lending, so it’s hard to tell.

It’s more of – typically touch base with the key players on a routine basis just to hear what’s going on. So…

First time I’ve even had that question asked, but this is your Q&A session, but I’m curious about where you’ve heard that?

No, just to be clear, I’m not hearing that on the motorhome side, I’m mostly an auto analyst and it’s a big discussion on the light vehicle side.

Okay.

So I just wanted to check in on the motorhome side. And I figured it was not a big issue because subprime customers are going to be buying effectively a second home on wheels, but I just wanted to double-check.

Yeah. Well, I think one thing that impact to Sarah’s point, but this has always been good paper even in the recession. Not a lot of the subprime stuff was getting into RVs. I mean it got pulled into the whole debacle, but I think the lenders will tell you that RV – that motorized RV paper was really good and lot of them wish they’d just kept it through the recession because there weren’t many defaults that way in the scale of things.

Okay, great. And sorry for the confusion there.

Yeah, no problem.

And that concludes the Q&A session. I’d now like to turn the call over to Mr. Potts for the closing remarks.

Yeah, well, thank you very much for your continued interest in Winnebago Industries and for joining us on the call today. We look forward to speaking with you again when we report our third quarter results on June 25. Thank you.

Thank you very much. This concludes today’s conference. Thank you for your participation. You may now disconnect and have a great day.