Winnebago Industries, Inc. (WGO) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Winnebago Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, today’s conference is being recorded. I would now like to introduce your host for today’s conference, Mr. Ashis Bhattacharya, Vice President of Strategic Planning and Business Development. Sir, please go ahead.

Thank you. Good morning, everyone and thank you for joining us for Winnebago Industries’ conference call to review the company’s results for the fiscal 2017 third quarter, which ended on the May 27, 2017. I am joined on the call today by Michael Happe, President and Chief Executive Officer and Bryan Hughes, Vice President and Chief Financial Officer. 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 earnings results was issued and posted to our website earlier this morning. Before we start, I would like to remind you that certain statements made during today’s conference call regarding Winnebago Industries and its operations maybe considered forward-looking statements under securities laws. The company cautions you that forward-looking statements involve a number of risks and are inherently uncertain and a number of factors, many of which are beyond the company’s control, could cause actual results to differ materially from these statements. These factors are identified in our SEC filings, which I encourage you to read. With that said, I would now like to turn the call over to our President and CEO, Michael Happe. Mike?

Thank you, Ashish, and good morning everyone. Thank you for joining us today. As we get started, I would like to take the opportunity to welcome Bryan Hughes to his first earnings call as the new Chief Financial Officer at Winnebago Industries. Bryan has been with Winnebago Industries for a little more than a month and we are very excited to have him on board. Bryan had an impressive two decade career at a fantastic public company in Ecolab and tremendous experience in helping that company to build a larger, more profitable, more diversified, and more valuable enterprise. We plan on leveraging Bryan’s experience as we look to do the same here at Winnebago Industries in the future. For those of you who have not had the opportunity to meet or speak with Bryan yet, I certainly encourage you to do so in the near future. I will begin this morning with an overview of key drivers for Winnebago’s fiscal 2017 third quarter and then turn the call over to Bryan to dive deeper into the specific financial results. We will then share some thoughts on our several important topics and some strategic plans going forward before we open the call to questions. During the third quarter, we continued to make good progress on our mission to transform Winnebago Industries into a larger, more balanced and more profitable outdoor lifestyle company. With the benefit of our expanded portfolio following the Grand Design acquisition last fall and continued strong organic towables growth from our Winnebago branded business, quarterly revenues increased 75% year-over-year to approximately $476 million. Consolidated revenues were essentially split evenly between the motorized and towables segments, reflecting our ongoing efforts to transform the RV portfolio into a full line business model and position the company to drive growth across the entire RV spectrum. This is a significant transition from 18 months ago when more than 90% of our revenues were generated solely by the motorized segment. We are now positioned to compete for market share across much of the RV industry. In addition to expanding our product and dealer reach across the RV spectrum, improving profitability has been another key area of focus and certainly was a strong strategic driver behind our acquisition last fall. Bolstered by the inclusion of Grand Design, during our second quarter earnings call, we have reported Winnebago’s highest gross profit margin in nearly a decade. We are pleased to report this morning that overall gross margins improved even further in the third quarter to 14.9%, a 380 basis point expansion over the same period last year driven by stronger profitability in our towables segment, improved product mix, and operational cost management. Similarly, we generated a 340 basis point improvement in our adjusted EBITDA margin year-over-year. This is a dramatic shift driven by both strategic intent and then execution to transition to a full line business model, and the renewed commitment at Winnebago Industries to deliver more consistently on the bottom line. Driven by the strength of our operating results, we continued to make significant progress in paying down debt following the Grand Design acquisition. As you know, this has been an important priority for us, and we are pleased to report that Winnebago Industries reduced its debt by $43 million in the third quarter, including the complete pay-down of our ABL facility. Since closing the acquisition on November 8, 2016, just over 7 months ago, we have now paid down $69.4 million in debt. This is a topic of high significance for us as we appropriately managed down our leverage ratio in a cyclical business. The de-leveraging also provides Winnebago Industries the strategic flexibility it needs on its balance sheet to consider either proactively or opportunistically how to further fund profitable growth in the future. Turning now to segment’s specific performance on the towables side, we continue to see retail demand growth well above the industry average for both of our Winnebago and Grand Design branded lines. Our towables businesses, while still small relative to our competition, are taking share on a daily basis and we are focused on maintaining that momentum. Backlog continues to be robust and we are seeing a definite trend of increasing consumer demand for higher quality products with great value, strong features and attractive price in some of the industry’s leading aftermarket service support. These are areas that our Winnebago and Grand Design brands are well-known for and we are working hard to capitalize on these trends to continue capturing market share. On the Winnebago branded towables side, we are realizing strong demand for lightweight travel trailers such as our mini service. The mini lineup continues to standout as a differentiated product line, one with personality esthetically that really resonates within customers, particularly millennials and first-time buyers. In addition to an ever-improving product lineup, we also made strategic upgrades to our Winnebago branded dealer network during the quarter, bringing on new partners that represent some of the strongest towable dealers in the market. Similar to Grand Design, our focus on Winnebago branded towables is to identify a primary leading dealer in each market and build strong, highly preferential, even exclusive relationships when possible. These strategic partnerships are starting to payoff through improved inventory turns and good margins for our dealer partners. Given our tremendous momentum and strong demand for Winnebago branded towable products, we are actively planning for an investment in increased production capacity over time and expect to have more to share with you all in that in coming quarters. Turning to the Grand Design brand, its strong and impressive growth continues and we couldn’t be more proud that, that team has been able to sustain their momentum as part of now the Winnebago Industries family. As I just discussed the acquisition has an immediate positive impact on our profitability and on the way the industry and especially our dealer partners look at Winnebago’s Industries commitment to competing in new and stronger ways in the future. We are also making great progress in terms of the formal integration, which is also slightly ahead of schedule. I want to specifically recognize the team at Grand Design for their ongoing superlative efforts. They have remained focused on their business value proposition and open to the strategic value that can come from a balanced and thoughtful integration process with a new parent. Across all four Grand Design product brands, we are seeing impressive retail demand and order intake with continued strong turns in the market. After just over 4.5 years, Grand Design has been able to capture nearly 11% of the fifth-wheel market share in the industry, an actually incredible accomplishment by the overall team but one we certainly won’t rest on. Grand Design’s fifth-wheel units continued to deliver above industry growth. The core Solitude, Momentum, and Reflection series remained very strong and the portfolio of Grand Design has now diversified into travel trailers. Given the emerging popularity of the Imagine travel trailer line, the products mix has shifted somewhat as our new Imagine production plant came online earlier this year. I will speak later in this call about the recent capital commitments we have made to further increase capacity within the Grand Design RV business. Nonetheless, Grand Design continues to innovate and release new fore plans to meet customer needs and as resources allow we will look to launch even more new series further down the line. There are many segments within the RV industry in the Grand Design and for that matter the Winnebago brand are not present in and we will and are evaluating those opportunities carefully. With regard to the motorized segment, revenues in the third quarter were down 2% year-over-year, as we continue our work internally to reset this important legacy business fundamentally in order to compete more successfully and profitably in the future. It is one of our most important priorities with material internal energy being directed right now on this imperative. The Winnebago brand remains one of the most iconic in the industry, in recent research conducted shows Winnebago with the strongest overall awareness and preference of any brand in the RV industry. As we have shared in previous calls, we are transitioning from the previous leadership strategy here of having two cloned brands in the motorhome business that mean Winnebago in the Itasca. The Itasca brand is no longer being manufactured at Winnebago and therefore we will not produce any further cloned models in the motorhome business. We will of course though service the thousands of Itasca end customers in the market, but for now we will focus on motorized manufacturing and sales efforts on the flagship Winnebago brand and build a solid good, better, best product line in each of the four motorhome product categories. This should enable our dealer partners to currently focus on the best brand in the industry and with improved product in the future to drive increased sales turn and margin. Our near-term challenge in the motorized business is to make significant strides and having even better floor plans, stronger eye appeal especially within our coaches and improving presence in the value segments of the motorhome category. Doing so will increase the close rate within customers on dealer lots and also captures the latent fashion so many of our independent dealers have and have had for our Winnebago brand. Later in the call I will share more details with you of some of the new products that are just now being launched through our channel. In order to create more nimbleness focus and accountability internally, we began an organizational reset in the motorized business in May which will go into full effect at the beginning of July of 2017. This reorganization will enable us to better align product managers with our sales force around each product category, effectively enabling us to tell the story of our products much more effectively to the customer. At the same time we are aligning our engineers by product class to drive greater speed to market as we improve our ability to deliver for the customer and capture ongoing trends. We are keenly aware of the work we need to do from a value standpoint in the motorized business. So our goal is not to make the cheapest motorhomes in the market, we do not want to go backward in terms of our industry leading reputation for quality and service levels. However, we are constantly striving to bring the market differentiated products that will meet customer needs across a broader spectrum of RV buyers. We are making progress and we will have some exciting new products and to launch an Open House in Indiana this September. On the Class A diesel side we are focused on the ramp up of our West Coast facility in Oregon. This project has taken a bit longer than we would have like to ramp up, primarily due to the activities needed to transition the supply chain from some of our internal vertical integration sources to outside suppliers more closely located to Junction City. These delays and continuing setup costs have put some pressure on our motorized P&L in the margins. We are though producing new diesel models currently in Junction City and we are working hard to cultivate the right local suppliers to maximize production efficiency while never sacrificing our quality levels. This industry segment remains relatively flat and our retail in fiscal year-to-date is very similar to this market trend. Future new products will bring a fresh look to this line. The Class A gas segment of Motorized remains a very popular category, but one that has softened in terms of year-over-year industry comps. When a vehicle is retail and shipments to the market in Class A gas more positive on a fiscal year-to-date basis due to some of the product life improvements we made for the 2017 model year. Quarter three’s shipment performance in Class A gas was especially positive. This is a good step in the right direction. Our future product plans should position us even more strongly to recover some of the previously lost market share in this space. Our Class B offering remains healthy and should benefit from new product launches in September. The industry continues to grow in this segment and increased competition from any sources will present both headwinds and tailwinds. More end customers are becoming aware of the tremendous benefits of owning a Class B and they are finding a broader array brand choices in the market as they shop. Winnebago’s retail to-date in this segment remains strongly in the double digit positive range, but we will need to compete more vigorously to retain a position at or near the top of the category. Class C is where the motorized industry is seeing some of the strongest current growth and it appears very similar to what happened in the Class A gas segment several years ago. The value sub-segment is very appealing to end customers right now and Winnebago has work to do to strengthen its position here. However, our popular Minnie Winnie line has performed solidly and the Navion is also gaining traction in the market. Particularly with the recent release of some innovative new floor plans including those with Murphy bed options. We will keep you updated with our currently active development plans in this segment to address in the future the good of our good, better, best line in Class C. Across the motorized segment we are focused on better understanding the voice of our customer and being more proactive and open minded with regard to addressing what our customers truly value. That should lead over time to improved innovation and differentiation, speed to market will also continuing to be a key area of improvement as we work on refining our processes to still be able to provide quality products and the high level of service our customers expect, but to do so more quickly and efficiently. As I have said before the transformation of this motorized business is not something that will happen overnight, but as we move through the final quarter of ‘17, I am encouraged by the work we have done so far and I am confident we are taking the right steps to position this business and our company for future success. There is an immense amount of pride at Winnebago committing to getting this right. With that overview, I will now turn the call over to Bryan Hughes to review our fiscal 2017 third quarter financials in more detail. Bryan?

Thanks Mike and good morning everyone. I will begin my comments by expressing how excited I am to be here this morning on my first earnings call as CFO of Winnebago Industries. And I am thrilled to be part of iconic company. Third quarter consolidated revenues were $476.4 million, an increase of 75% year-over-year driven primarily by the Grand Design acquisition and strong organic growth from our towable segment. Third quarter operating income was $34.9 million, up over 69% and net income was $19.4 million, an increase of 34%. In the quarter, we have recorded $10.2 million pretax of amortization expense associated with the Grand Design acquisition. Reported earnings per share was $0.61 per diluted share, an increase of 15% over our $0.53 EPS in Q3 of last year. For the first nine months of fiscal 2017, consolidated revenues were $1.092 billion, an increase of 53% over the prior year period, also driven substantially by the Grand Design acquisition. Operating income for the first nine months was $81.6 million, up 74% and net income was $46.4 million, an increase of 43% over the prior year period. Year-to-date, we have recorded $22.6 million pre-tax of amortization expense associated with the Grand Design acquisition. As illustrated in our consolidated statements of income, there were a few significant items related to Grand Design acquisition impacting our third quarter of fiscal 2017. First, additional transaction costs related to the acquisition were $500,000 or $0.01 per diluted share net of tax. Second, in repeating what I mentioned previously, amortization expenses related to the definite life intangible assets acquired were $10.2 million pre-tax in third quarter or $0.21 per diluted share net of tax. Beginning in the fiscal fourth quarter, we expect amortization expense will decline to approximately $2 million pre-tax per quarter through fiscal 2021. Finally, interest expense related to the debt associated with the acquisition, was $5.3 million pre-tax or $0.11 per diluted share net of tax. And as Mike mentioned, we paid off our ABL facility in the third quarter. We have provided non-GAAP EBITDA and adjusted EBITDA performance measures in our press release as a comparable measure to clearly illustrate the effects of the items I just reviewed. The schedules accompanying the press release saw reconciliation between net income and adjusted EBITDA. As these schedules show, consolidated adjusted EBITDA for the quarter was $47.3 million, an increase of 167% year-by-year from the $17.7 million in Q3 of last year. This was a 340 basis point improvement in adjusted EBITDA margin to 9.9% for the quarter. Turning to the individual segments, Motorized revenues were $241.7 million for the quarter, down 2% year-over-year. For the first 9 months of fiscal 2017, Motorized revenues fell 2.1% year-over-year reflecting lower average selling price and the company’s exit from the aluminum extrusion business to outside customers, which drove about a point of the decline. Segment adjusted EBITDA was $12.6 million for the quarter, down 22% year-over-year. Adjusted EBITDA margins decreased by 140 basis points primarily driven by pricing adjustments and cost associated with transitioning production to the company’s Junction City, Oregon facility. For the first 9 months of fiscal 2017, segment adjusted EBITDA was down 20% year-over-year and adjusted EBITDA margins decreased 110 basis points. On the towables business, revenues were $234.7 million for the quarter, up $209.3 million year-over-year driven by the addition of $196.9 million in revenue from the Grand Design acquisition as well as continued organic growth from Winnebago branded towable products. For the first 9 months of fiscal 2017, towables revenues were $456.5 million, up $393.6 million from the prior year, with $366.3 million in revenue from the Grand Design acquisition and 44% growth in Winnebago branded towable products. Segment adjusted EBITDA for the quarter was $34.7 million, up $33.2 million from the period year and adjusted EBITDA margins increased by 880 basis points primarily due to the inclusion of Grand Design’s products within this segment. For the first 9 months of fiscal 2017, segment adjusted EBITDA was $59.3 million, up $55.2 million over the prior year and adjusted EBITDA margins increased by 640 basis points. Turning to our balance sheet, as Mike discussed during the quarter we significantly strengthened our balance sheet by paying off our asset-backed loan and we reduced debt by $43 million, so good progress on that front. As of the quarter end, the company had outstanding debt of $286.9 million, net of debt issuance cost of $10.1 million. Working capital was $120.8 million. The debt to equity ratio was 68.9% and the current ratio was 1.7% as of quarter end. Cash flow from operations in third quarter was $62.2 million, which is an improvement of 53% year-over-year. Capital expenditures for the year-to-date period were $9.7 million. ERP expenditures to-date have been $23.5 million. We expect total expenditures to be approximately $38 million to wrap this project up leaving approximately $14.5 million yet to be incurred between capital and expense. Before I conclude, I would like to recap a few key items. As mentioned earlier, we booked $10.2 million pre-tax of amortization expense related to the Grand Design acquisition in third quarter. Our amortization expense for fourth quarter of fiscal 2017 is expected to be approximately $2 million. Beyond fiscal 2017, we continued to expect amortization to be roughly $8 million annually or $2 million each quarter through fiscal 2021. Our expectation for interest expense for the fourth quarter of fiscal 2017, which includes amortization of debt issuance cost, is $5.2 million which is of course dependent in part on interest rates and the amount of debt balances that remain outstanding. The overall effective income tax rate for the third quarter of fiscal 2017 was 34.6% compared to 30.2% for the same period in fiscal 2016. The increase in effective rate is due primarily to higher pre-tax income associated with the acquisition of Grand Design with permanent deductions that are lower as a percentage of pre-tax income. That concludes my review of our quarterly financials. I will now pass the call back to Mike for some final comments.

Thank you, Bryan. Before we turn to Q&A, I would like to cover a number of different topics, some pragmatic and some strategic in this closing section. First, the most popular question among analysts and investors alike continues to be how much more light is there in the upward part of the cycle. And Winnebago Industries and similar to many of our fellow stakeholders within the industry, we remain cautiously optimistic that there remains runway within this current industry cycle search. The macroeconomic conditions of the U.S. market, while not stellar are in fact still steady and favorable for selling RVs. Fuel prices, interest rates, consumer confidence, the wealth effect and household debt remained mostly steady with some in fact uptick recently in interest rates and credit card debt. However, most importantly, in our opinion, our three major factors in why the shipment and retail growth in the industry is being sustained. One, we are now seeing a larger wave of younger demographics, generations X, Y and millennials, many of which have an SUV or pickup already in their driveline embracing the outdoor lifestyle and beginning to buy larger quantities of RVs. Combined with the still strong baby-boomer segment, the industry is seeing an appetite for new products on both ends of its consumer population. Secondly, our end customers are using and demanding products for an increasing variety of different purposes. RVs are showing up in more places than ever before and being used professionally and personally on and off the grid. Lastly, the OEMs and the industry overall, including our dealers are very focused on providing affordably priced RVs with an increasing array of features and telling the story collectively of why the RV lifestyle is such an exciting one to join. It’s a great time to be a buyer in this industry. We are watching carefully though the signs that would traditionally signal a slowdown, aging inventory, challenging retail credit applications, creative selling approaches, irrational competitive behavior etcetera. Most are not raising inordinate concerns at this time. Winnebago’s field inventory is rising in its towables segment especially, but for the right reasons. We are taking share and stealing lot space that was traditionally our competitors. Overall, as stated before, we are cautiously optimistic that more positive growth for the industry in the future quarters lies ahead. Now, Winnebago Industries’ overall backlog at the end of the third quarter has never been strong and while the overwhelming majority of this backlog is from our surging towables business and specifically Grand Design, we did see a positive backlog status on the motorized business for the first time in several quarters. And while we are very well aware of our competitors backlog status on motorized, this is still a good sign for Winnebago Industries within a segment that we are working hard to regain product totality and confidence with our dealers. And while a strong backlog on the towables business is the direct sign of the momentum we have, it is not always a positive situation for many of our dealers especially in the Grand Design business. Too regularly, it is taking several months to deliver the inventory on a specific dealer order and there is increasing urgency for us to remedy this, maximize retail and stay ahead of our own growth potential. And so we continued to work toward expanding capacity across the Winnebago Industries business to serve today’s needs and to be ready for our plan growth of tomorrow. We are analyzing this area carefully and will make intentional investments were needed. We are focused on leveraging operational excellence, workflow analysis, material flow and other tools to organically increase throughput as well and across all locations. Now with regard to specific locations, we are seeing diesel units rollout of the plant at our West Coast facility. There is tremendous opportunity there to drive increased production, not only diesels, but perhaps other products on that campus someday. In North Iowa we continued to expand dedicated capacity for Class B and Class C. We have added a new line for Class B vans in our Lake Mills plant and have transitioned part of Charles City facility to now assemble Class C products instead of their previous Class B assembling. With our diesel production having been mostly relocated to the West Coast, we have also freed up capacity in Forest City reducing constraints at a previously restricted our North Iowa Class A production. We are literally as we speak reflowing our product lines across all of Forest City assembly lines and specifically dedicating a line in the future to new Class A gas business. And most importantly capacity wise, we are raising towards further investments in our Indiana based businesses. The Winnebago Board of Directors has recently approved a plan to build out the rest of current Grand Design campus in Middlebury with several new assembly plants and expanded lamination capacity. This was a multi-year capital commitment by the Winnebago Board of Directors to the Grand Design leadership team to provide the capacity necessary to seize the full potential of this new division. We could have looked at this one building at a time, but my message to the Grand Design RV team was to present the Board the full extent of what they thought they needed to maximize output from their current campus while still managing our cyclicality management practices. This resulted in a double digit million dollar capital request which was approved during the May Board meeting. This will enable both increase capacity to reduce the backlog we mentioned earlier, but it will also provide us the capability to further build out the Grand Design RV product line in the future which can increase at both breadth and depth. We are not ready for share specific timing details today, but when that capacity will come online, but our fiscal years of 2018 through 2020 should benefit materially from this decision. And while we do not have something similar to announce yet on the Winnebago branded towable side there is activity ongoing in that division as well to ensure that we have the ability to grow according to our expectations in the future. Next, I would like to speak in more detail about some of the new product development work that has been ongoing in our motorized business. For several quarters we have been very honest about the increasing pressures we have seen in market share especially on our Class A gas line, but also due to increasing competition on Class B and improving the price value options in Class C. We have begun recently managed and selective sales, not shipment introduction of several new Winnebago branded motorhome products. A new Class A gas opening price point series has recently been viewed by several of our top dealers receiving positive feedback about Winnebago’s advancement in this value segment and dealer orders will be taken very soon. A new Class B series that allows end customers the ability to get even closer to the outer action off road is receiving nice introductory feedback as well. And a new Class C Navion floor plan with an innovative new Murphy bed option is drawing rare reviews on space utilization and interior décor. These new products are all in the initial sales stages and our dealers and then customers will be placing orders soon and certainly buy at the Open House later this fall where we plan to have even more new models and floor plans to share. All of these new products were intended to have an accretive impact on motorized sales in fiscal ‘18 beginning this fall in September of ‘17. This is the beginning of a stronger new product development pace within this business. Many of you also know that we recently completed for the first time in a very long while a long range strategic plan process here at Winnebago Industries. This culminated with the presentation to our Board in May with the latest 3 year fiscal ‘18 through fiscal ‘20 financial outlook and the review of our key long range strategic themes. This process is part of a cultural shift here at Winnebago Industries to be more flexible and responsive in the short-term, but as importantly be more strategic in the long-term staying ahead of the business and some days setting the pace of competition and innovation in this industry. We have a long ways to get there. It is our intention now to share with the financial community this fall during an Investor Day most likely in October on the East Coast the highlights of this 3 year plan and several of our financial and non-financial goals. It is exciting with this new leadership team and a supportive engaged Board to be having these conversations about our future ambitions. Stay tuned for more details on this Investor Day event. We remain consistent however to our long-term strategic priorities. Number one, build a high performance culture by creating an unique blend of leadership, accountability and giving internally and externally. Two, strengthen and expand the core RV business, re-energizing our motorized segment and investing in strong towables market share growth. Number three, elevate excellence in operations, driving higher levels of safety, quality and productivity. Number four, leverage innovation and digital engagement, creating a connected customer experience. Number five, expand to new profitable markets, investigate diversification both inside and outside RVs. As we approach the end of fiscal ‘17, I am very proud of the progress our team has made this year at Winnebago Industries. The highlight of which of course was successfully completing our transformative acquisition of Grand Design and the ongoing successful integration and performance of their business. We have so much work to do though, particularly on the motorized side of the business and on towables we still have approximately only 5% retail market share in the industry. But we are well on our way to becoming a larger, more diverse and hopefully more profitable outdoor lifestyle company. As you can hopefully tell we are optimistic about our future and the future of our industry as a whole. We are expecting another strong year for the industry in fiscal 2018 as more Gen X-ers and Millennials enter the market and embrace the outdoor lifestyle. We will continue to strive to become the most trusted company in the industry. We have two tremendous brands Winnebago and Grand Design by constantly improving our understanding of our customers and delivering the products and aftermarket support they deserve. And lastly before we open it up to questions, I would like to end this call or at least my portion by thanking all of our employees across the entire enterprise for their hard work during the quarter and their continued dedication to fulfill and live out Winnebago’s industry’s [ph] vision. They are the teammates who are truly making positive things happen. Bryan, Ashis and I have the privilege to be the messengers today, but our teammates were the critical ones making positive things happen. Thanks very much for your time today listening to the call. And I will now turn the line back to the operator for the Q&A portion.

[Operator Instructions] Our first question comes from the line of Craig Kennison with Robert W. Baird.

Hey, thanks for taking my question and congratulations. First question is on the new capacity for Grand Design, is there any concern about your ability to access labor in what has become a very tight market for labor in Northern Indiana?

Good morning, Craig and thanks for the question. It is a good one obviously. We have had thorough discussions around this investment decision about the North Indiana labor market and it is in fact a very tight one, especially as the RV industry has grown both OEMs and suppliers continued to obviously look to attract workers to the industry, but also optimized the productivities of their current workforce. We obviously wouldn’t have made the investment decision if we didn’t feel as if that we had line of sight to attracting the workers necessary over time to working in those additional plants. We understand that there would be natural questions on pressure about wage inflation. I would tell you that with Grand Design being a relatively young company and even our Winnebago towables division in its still infancy in our opinion, we are gaining workers today for both businesses primarily from some of our competitors within the space. I think the growth nature of our business, the cultures we hopefully run within those businesses, and certainly competitive compensation practices are all attractive in helping people come over. I won’t share specific details, but we have a waiting list today of employees that are ready and willing to work at Grand Design. But as we have signaled, we are not quite ready with the infrastructure yet to employ them. So, it is a situation we will monitor carefully. And as I also mentioned earlier, there may be some other locations throughout the Winnebago enterprise that we could pursue other labor or production in if we found ourselves against a brick wall there or someday.

Thank you. And then you mentioned some exciting new products coming in the Class A and the Class B segment, what would the margin implications of those new products be, anything we should be aware of there?

Well, I would tell you I will start with the Class B side. This is truly going to be product with hopefully a unique value proposition and differentiated in the market. So, my hope with that product obviously is that we can earn a fair retail price on the street with our end customers and certainly with our dealers earn a fair margin and allow them to have a fair margin as well. The Class A gas is an interesting question on that in this way. We have been and Bryan alluded to it in his comments, we have been under some price pressure already on our motorized business as our lineup in the value portions of motorized has been weaker than we would like. And so we have been more aggressively supporting retail sales and helping the dealers price some of our products to be more competitive already, and so a good example of that would be our Vista line on the Class A gas product. That product has become more competitive both through some new floor plans, but also through some more aggressive pricing on our end, but in reality that has had an impact on our margins as well, and And so we have been very conscious of the cost target on the new product that we are going to introduce. We’ve actually taken -- without sharing too many details competitively, we have taken a whole different design approach to this project. It will have many of the same Winnebago historical characteristics, but it will also demonstrate that we are willing to design differently to hit those price points. So, I think anytime you strengthen your line at the lower price points, it’s largely not going to be overly margin accretive, but I am hoping we can take some price pressure off of lines like the Vista that we have had to kind of push down further when we introduced this line as well.

Great. Thanks Mike.

Thank you, Craig.

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

Hi, good morning. I was hoping you could discuss gross margin for the core Winnebago business if you excluded the mix from Grand Design, and then on Class A was that up 22%, a little bit more detail on what’s going on there in the quarter? Should we expect that sort of growth going forward? Thank you.

Yes, Gerrick, this is Bryan. I guess, there is a couple of things I would call out for the quarter. First, we have a little bit of a mix thing we are fighting on the motorized side with the Class Cs being down a little bit in the quarter. And then we also had as Mike referenced some pricing to get our products positioned in the right place, the pricing certainly affected us negatively in the quarter on the motorized business. And then we have the costs associated with the ramp up of our West Coast facility and the lower productivity obviously of that new facility versus our Forest City facility. So, those three things are the primary drivers. We obviously have lift in the towables segment, primarily as we cited from the Grand Design business, but I don’t think you are asking about that. You are asking more about the base business, pre-acquisition. And those are the call-ups that I would make. The towables business, the Winnebago branded towables business continues to have improving margins. So, it’s really the motorized side that we are focused on improving the margins on and also those were the drivers of the quarterly margin.

And I can speak to the – I think your question Gerrick was around the increase we saw in the Class A products. And again, hopefully I covered that a little bit in my comments or answer to Craig’s question. We have been working hard there to rationalize the line, introduce stronger floor plans that are more meaningful to our end customer and obviously be a bit more aggressive promotionally on some of the pricing there. We have had to play defense a bit to make sure that the market share dilution was an even worse than it had been trending. And so I think we started to stem that. But as I said with hopefully a new product in that category that we will be introducing in the future, we will have a more natural way to support that retail going forward. But most of that increase in Class A guest has been around what we call our distal line which is retail wise has been quite strong for our fiscal 2017 year.

Okay, thank you.

Thank you.

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

Thanks. Good morning. You touched on demographics a bit, can you talk at all about what percent of your customers are over say age 50 or 45 either at the overall company level or it’s between motorized and towable?

Good morning, David. I don’t have those specific numbers in front of us. I would tell you this on the motorized side it is still above 50%. I mean, the most of our motorized customers are probably still in that Gen Xer in especially baby-boomer segment. I don’t think there is any doubt to that. I have to go back and try to dig some of those out, but it’s a fair majority percentage. I would tell you though on the towables side, that number is significantly lower. The average age for an RV buyer in the industry is in that mid to late 40s range and a lot of that is driven by towables having an even younger demographic than the motorized side. So, I would venture to guests that we see probably a more 50:50 split, maybe even 60:40 leading younger on our towables businesses. Now, the Winnebago branded business is a little bit heavier than the travel trailers now. So, they have got lower price points, easier affordability. The Grand Design line is still a little slanted sales wise to luxury fifth-wheelers and that’s because of the higher price points there. You are probably going to see a little bit older customer, but David, we could work with you and any others interested to try to get you some more information on that certainly in the future detail wise.

Yes, that would be helpful down the road if you have the data. And there is one question on acquisitions, do you have the strong preference between if you were to make another deal at some point, would you want to do it with another motorized firm or towable firm or something in the outdoor lifestyle or you don’t really care as long as it’s one of those three?

We are going to be careful with our comments here around non-organic business development. I think we have demonstrated with the Grand Design acquisition that we were comfortable with making an RV play, especially in that case one that gave us a fighting chance to compete on the towables segment. Now, again, we are still very young and very small there. We have got as I said earlier of around 5% retail share. There are very few private players left in the RV industry and all of the other OEMs know who they are. I probably won’t tip my hand there as to which ones we think might some day if they are willing to engage us that we might be interested in. The outdoor lifestyle question is one we are continuing to work on here with Ashis’ leadership. We have another board meeting in August with our Board and we will be having further discussion with them about some of the frameworks and lenses that we are looking at there. As Bryan articulated in the call, we are making good progress on the de-leveraging side. We have our leverage ratio down somewhere in the 1.8 range I believe and we have been very clear that we want continue to drive that down, but probably someday not to zero. So stay tuned I guess on that I wish I could answer that more definitively for you, but we are not ready to tip our hand competitively nor in some cases with outdoor lifestyle have we probably reached any collusion there. And we have a little bit of time left here we think with some of the de-leveraging work we need to do.

Okay. Thank you very much.

Thank you, David.

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

Hi, good morning. Can you say – tell me what the Grand Design growth was in the quarter and year-over-year or during the period year-over-year and then was there any downward pressure on that given what sounds like some supply constraints you are having?

Well, I would tell you we are experiencing very similar growth in both our Grand Design and Winnebago brand in towables businesses from a comp standpoint. And I think Bryan shared a few numbers in the call. I will put it this way, it’s been running roughly around 15% for both businesses and its plus or minus for each of them, but that’s roughly the percentage growth that we have been seeing on those lines. In terms of your question around supply chain constraints, it’s a good one as well, our friends at Lippard and Patrick [ph] and any other suppliers in the industry are certainly bearing the burden of growth of the industry as well and trying to attract the labor, but also manage their own capacity constraints as the industry grows. So there are times in our daily and weekly production processes that you see some pinch points created by certain components falling behind a little bit. It’s obviously something we have been able to overcome and we worked very diligently with our suppliers to try to stay ahead of that. Now, given our size, we may not always be first in line if they have to trade what’s coming off their lines between us and our two other larger competitors. But the reality is we have been able to get what we needed. So we will work very carefully to make sure that any suppliers we partner with in the future have the ability to meet our growth expectations, but hopefully very honestly give us a preference in how they work with us so that we can create differentiated products in the market with them.

Okay, thank you. And then just on the I guess the expansion idea for Grand Design and maybe possibly towable business or wholly owned towable or the legacy towable business, I mean is there a order of magnitude we should be thinking about or what type of investment this might be and what the timeframe to implement it is and then what the potential risk is if the cycle does kind of trail off sooner than you expect, how soon can you ramp that facility down to lower production cycle?

Absolutely and obviously a great question there with the cyclicality nature, because and I know some of our competitors are investing in increased capacity as well, so it is somewhat a nervous stage with the cycle to be making some of those capacity and increased investments. But I will tell you this, I referenced in my comments that the investment in the Grand Design, investment in our capacity expansion specifically is going to be a double digit million dollar number. We do lease those buildings, but our portion of the investment is still a double digit investment over the entire proposal that the Board approved here recently. The sequencing of that for purposes that you stated later in your question, we will sequence this. We are not going to do all of this at once, but we went to the Board and said listen, here is the current land that we have, here is long range plan for Grand Design in order to bring this long range plan to life we need more capacity and we would like to present to you a master plan in order to do so. And so if you were to visit the Middlebury campus right now for Grand Design, they have been clearing land recently and starting the process so that some of these new buildings can go up. But we will stage them somewhat so that if for some reason the industry does take a downturn here in the next 6 months, 12 months whatever hopefully it’s not that soon, we would have the potential to either delay or postpone or potentially not open. So certainly there is some investment or cost risk in doing that, but we have a plan to build out that campus and it’s approved and we will begin that and you will see the revenue and share benefit of that over the next 3 years. But beginning in F ‘18, we will sell more product in F ‘18 because of that investment approval, but we will continue to hopefully increase capacity throughout the next couple years.

Okay, thank you.

You’re welcome.

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

Hi guys. Questions we will pick over here, but just one item here, if you look at total sales, set of sales, what would you guess the made first time buyers as a percent of sales both in motorized and towables and are you seeing any changing patterns there?

We do not have that number Morris. Good morning by the way. We do not have that number for ourselves. I don’t believe – well, we couldn’t probably drive that number out of our database. We don’t have that specific question on the retail registration. So if they are new to us that doesn’t necessarily mean that they are new to the industry. Now the RV industry and the camping industry have done some recent work that says approximately I believe around a third of the of the people that are entering both the camping lifestyle, but also the RV lifestyle are in fact new to both of those lifestyles. And so if I were to guess for the industry it’s probably in that 25% to 35% range. I can’t speak specifically to that because we don’t actually this is why I love these calls, because you guys give us great ideas. But we don’t – I don’t think we ask our customers if they are new to the lifestyle. They may be new to us and we certainly can know that number, but my guess Morris is that it’s probably a third or less.

And is that different than let’s say was a decade ago or not looking in the up down cycle but does that change?

I can’t speak to that question primarily because of I have been in the industry for 18 months. So again we can help you offline with the RVIA, our industry association to try to understand that. I don’t know the answer to that.

So I am just trying to understand what is going forward, demographics working for you, but other things are the tailwinds or possibly headwinds that can interfere in this cycle continue longer than which has been normal kind of taking at that, I sided that and no other questions?

Thank you. Have a great day.

Thank you.

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

Good morning guys and congratulations on the great progress you made in the quarter.

Thank you good morning.

Can you have a talk about the Oregon ramp up maybe just could – could you divulge what the actual startup costs have been and the timing of when you expect those startup costs to abate. And secondly regarding Oregon you talked about utilizing more outsourcing versus the vertical integration maybe just talk about that how you view that setup across the entire company?

Yes. So real quickly and thanks for the questions. A bit of history and that decision was made in fall of 2015 and I know arrived in January of ’16 and quickly started to understand the decision that was made out there that the strategic rationale was to ultimately invest in a newer facility that was more accommodating for these larger 42 foot to 45 foot diesel coaches and obviously get closer to the West Coast customer and along with that came the acquisition of a good premium diesel brand called Country Coach. The approximate range of I think total costs that we are in for are somewhere in the $15 million to $20 million range for total investment in that project and that includes both the acquisition of the assets, but ultimately some of the startup costs around machinery and the like. I would tell you we are on the tail end of some of these startup costs, but what we are now starting to see as Bryan alluded to with production still be relatively low out there is we are not seeing some of the productivity numbers that we would generally have seen in a full plant in Forest City. So, we are probably going to be victims of a bit of a lower gross margin on our diesel line for a little while here in the future as we get full production ramped up there. So, I would say going forward, it’s probably more going to be gross profit pressure than it well be any capital investment or significant expense pressure. The vertical integration that we had in Iowa has always served all of the motorized product that we have ever made in the North Iowa plants. As you can imagine especially for these large products, the cost of freight in shipping from our vertical integration facilities in Iowa out to a facility in the Northwest is one that comes with not so immaterial cost. And so we have been working hard to find alternate suppliers closer to the Junction City plant that can produce some of the products for those diesel products that we have historically made. And so, it’s actually been a good exercise, because it’s forced our engineering team to truly create drawings and bill of materials on a way that we can make good make buy decisions. And it probably prepares us as we in the future further rationalize whether we want to stay in all of our current motorized vertical integration value streams, it really is preparing us to go through a similar process as well, no matter where final assembly is done. So – but we have – that has taken a lot longer than I would have liked though I know a lot longer than the original plan, but we have the ability to make hundreds of diesel coaches on an annual basis out there and we are really just at the very front end of that and that’s another area where our market share in diesels is down right now. I would say the wounds are mostly self-inflicted, but the motorized team has a plan certainly to remedy that in the future.

Got it. And just the last question is also about Oregon, you made a comment about potentially moving some towable production out to that facility, can you maybe just talk about that a little bit more? I know some of your competitors have expanded their towable production out west, maybe just talk about the opportunity and maybe a timeline whether there is any sense of urgency, particularly given the cost advantages of not having to shift those less expense or units out west? Thank you.

You are welcome. Thanks for the question. First of all, a comment that I don’t know if I said towables, I think I said that we reserve the right to look at that campus for other product. You are correct in that our OEM competitors, many of them, almost all of them that are the big ones have some facilities out there, especially around the lightweight travel trailers, because the cost of freight from the Midwest to the West Coast on those as a higher percent of the total selling price or cost of the product. We have several buildings out on our Junction City campus. Some of which today are not as full or as busy as they should be. And very candidly, we also have several acres of grants that is sitting there with a potential Greenfield opportunity. We have made no decisions about putting anything else out there. I will tell you though and back to some of the capacity constraint conversations we have had and also some of the conversations we have had around labor, we are well aware that we are building some systems out in Oregon and have a campus out there that could be utilized further by any of our divisions in the future. So, stay tuned, it’s an active conversation. We are not ready to announce anything and we have plenty of people here who are RV veterans that have experience in production in the West Coast in their previous lives and that would be a good thing when and if we ever tap into that.

Got it. That’s all I have. Thanks for taking my questions.

Thank you.

I am showing no further questions in queue at this time.

Thanks everyone for joining our call today. I hope all of you have a really enjoyable summer and we look forward to talking to you again when we review our fourth quarter and full year results. Thank you very much.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program and you may now disconnect. Everyone have a great day.