Winnebago Industries, Inc. (WGO) Q3 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Quarter Three Winnebago Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer-session and instructions will follow at that time [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Steve Stuber, Director, Financial Planning and Analysis and Investor Relations. Sir, you may begin.

Good morning, everyone. And thank you for joining us for Winnebago Industries' conference call to review the Company's results for the fiscal 2018 third quarter which ended May 26, 2018. 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 Web site at investor.wgo.net, and a replay of the call will be available on our Web site later today. The news release with our third quarter earnings result is issued and posted to our Web site earlier this morning. Before we start, I'd like to remind you that certain statements made during today's conference call regarding Winnebago Industries and its operations, 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 in a number of factors, many of which are beyond the Company's control, could cause actual results to differ materially from these statements. These factors are identified in our SEC filings, which I encourage you to read. With that said, I would now like to turn the call over to our President and CEO, Michael Happe. Mike?

Thank you, Steve and good morning everyone. We sincerely appreciate each of you for joining in on the call this morning as we review Winnebago Industries' fiscal year 2018 third quarter results. As always, there are numerous topics to discuss. I will begin this morning's session with a high-level summary of the quarterly results, and then will hand the floor over to our chief financial officer, Bryan Hughes. Bryan will describe in greater detail our financial performance. I will return with closing comments as we review progress on several strategic initiatives. And we will end this morning's call with a Q&A session. Our third quarter performance reflects our team's continued progress toward building a larger, broader and more profitable premier outdoor lifestyle company. Despite increasing headwinds on the material cost side, our team drove strong top and bottom-line results in Q3 with impressive growth relative to last year. Our emerging Towables business segment again led the way in terms of market and financial performance, yet we also continue to see positive signs of our Motorized business gaining traction on improved internal and external progress. And while not of any financial consequence within the third-quarter, we announced on June 4 our expansion into a new outdoor lifestyle segment via the acquisition of America's luxury boat builder, Chris-Craft. Consolidated third-quarter revenues increased 18% year-over-year with strong organic growth driven by both of our Towables businesses. Gross margin increased 30 basis points, driven primarily by a favorable portfolio mix between our segments, and careful navigation of cost input pressures through select price increases, smart product content management, supplier negotiations and internal cost reduction activities. Turning to the segments in more detail. On the Towables side, both the Winnebago branded and Grand Design branded RV businesses continued to outpace the market and gain share. Towable revenues increased 33% year-over-year, again showing strong organic growth from both branded businesses. Margins expanded slightly due to fixed cost leverage and previously mentioned cost mitigation activities. Backlog for towables for the quarter increased 15% year-over-year, which supports our positive outlook and expectations for future growth in our Towables segment. We continue to see growth in the overall Towable RV market and are pleased that Winnebago Industries continues to take both retail and wholesale market share with both of our brands. Our confidence in our performance is reflected in our capacity expansion efforts. During the quarter, we broke ground on our previously announced Winnebago Towables expansion project and brought online a new Grand Design RV production line. We are looking forward to having additional capacity to address the backlog and deliver more of the products our customers love, as well to bring innovative new products to market. The Grand Design RV Transcend line has gotten off to a solid start, giving us a strong entry into the largest segment of the towable market, introductory travel trailers; a reminder that we still have extremely low share in the Stick-and-Tin sub-segment, the largest category within the Towables arena. And overall, the Grand Design line continues to be healthy in terms of retail velocity. The Winnebago branded mini-plus fifth wheel continues to ramp up market placement as well, gaining dealer lot share and demonstrating encouraging initial retail performance. And while we are excited about that product too, we also admit that we have much work to do in our Winnebago branded fifth wheel and toy hauler product lines, which represent yet another future opportunity for growth. Turning to the Motorized segment, we continue to make measured yet steady progress. Unit shipments versus a year ago were positive for another consecutive quarter. Encouragingly, we saw our third quarter EBITDA margin increase 170 basis points versus our second quarter fiscal 2018 margins as our efforts to improve operational efficiency are beginning to yield results. Additionally, we collaborated with our suppliers, augmented RV content and implemented select pricing adjustments to account for rising input costs. We have materially higher aspirations for our Motorhomes segment profitability in the future, and we will continue to work diligently to that end. And finally, our Motorized backlog continues to be healthy with a 30% increase versus a year ago at the end of quarter three. With respect to our evolving motorized product line, our Class B Revel product is leading the charge as the flexible off the grid 4-by-4 vehicle has resonated with dealers and customers alike. Retail and dealer demand have exceeded short-term supply capabilities, a good problem and one we are actively working on for the fiscal 2019 year. The intent is helping us compete more effectively for value priced Class A Gas share and the Class C Outlook, which hit the market toward the end of the third quarter gives us a new entry into the Class C Value category and rental market, and continues our recent track record of bringing to market new motorized products with stronger customer appeal, better value and shorter development cycles. While the outlook had a minimal impact on third quarter performance, we will look forward to realizing meaningful contribution as sales ramp up in future quarters. We remain laser focused on addressing the challenges facing our motorized business, and continuing to make the foundational improvements to enhance our overall product portfolio and drive profitability. As you've heard me say, these are not overnight fixes but rather a gradual progression to sustainable, stronger performance. We continue to rationalize the line obsoleting older product brands and series that are not performing, and introducing new brands and models that appear to be driving accretive retail early in their product lifecycle. This pivot is happening internally but also externally as we work to turn over the dealer inventory into a healthier assortment. Our objective is more volume across a leaner line of strong products. Before I turn the call over to Bryan Hughes, I just want to note that in the third quarter, we distributed a portion of the tax reform benefit in the form of employee bonuses and a meaningful contribution to our Winnebago Foundation. We discussed this in detail at our quarter two earnings conference call, but much of the financial impact occurred in quarter three. We’re very pleased to be able to share this benefit with our hard-working Winnebago Industries employees, and I as always, thank them for their dedication and commitment. With that overview, I will now turn the call over to Bryan Hughes to review our fiscal 2018 third quarter financial results in more detail. I will return to discuss our strategic initiatives, the very fluid dynamics in the North American RV market, and of course, our new venture into the Marine space via our recent Chris-Craft acquisition. Bryan?

Thanks, Mike and good morning, everyone. Third quarter consolidated revenues were $562 million, an increase of 18% versus last year, driven primarily by strong organic growth in the Towable segment. Gross profit was $86 million in the third quarter, an increase of 21% versus last year, driven by continued growth in the more profitable Towable segment, which accounted for 56% of total revenues for the quarter. Gross profit margins expanded by 30 basis points, driven by a combination of business mix, pricing adjustments, fixed cost leverage, and operational improvement, which more than offset inflationary pressures that we are beginning to see, as well as previously disclosed investments in our West Coast facility. The tariff impacts on aluminum and steel have contributed to an increase in domestic spot markets for these raw materials, and we continue to monitor the market and analyze the impact to our costs so that we can react prudently. Third quarter operating income was $48 million, up over 39% and net income was $33 million, an increase of 68%. Earnings per share were $1.02 per diluted share, an increase of 67% over the $0.61 in the third quarter of last year. As Mike mentioned, the Company recorded $4.7 million, or an $0.11 per share one-time expense in the third quarter related to the distribution of the benefit received as a result of the Tax Cuts and Jobs Act. This $4.7 million was comprised of one-time employee bonuses and a contribution to our Winnebago foundation. It had 60 basis points impact to gross margin percent and an 80 basis point impact to OI and EBITDA ratios. We have provided non-GAAP EBITDA and adjusted EBITDA performance measures in our press release as a comparable measure. The schedules accompanying the press release show reconciliation between net income and adjusted EBITDA. As these schedules show, consolidated adjusted EBITDA for the quarter was $53 million, an increase of 13% year-over-year. Excluding the one-time tax reinvestments in the quarter, the increase to adjusted EBITDA would be 23%. Turning now to the individual segments. In the Towable segment, revenues were $313 million for the quarter, up 33% versus last year, driven by continued strong organic growth across the Grand Design RV and Winnebago branded lines. Segment adjusted EBITDA for the third quarter was $44 million, up 34% from the prior year and adjusted EBITDA margins increased 10 basis points. While we are experiencing some inflationary pressures on our cost input, we have been able to mitigate those pressures through cost savings initiatives, fixed cost leverage and by executing selective price increases where necessary. Towable backlog remains strong at nearly 10,000 units, growing 15% and retail sales continue to outpace the industry for both the Grand Design RV and Winnebago branded lines. Motorized revenues were $249 million for the quarter, up 3% versus last year, driven by the improvements brought about by the recently introduced new products, including sales of the new Class C Outlook that began in the quarter. Segment adjusted EBITDA was $9 million for the quarter, down 36% year-over-year. Adjusted EBITDA margin of 3.7% decreased 230 basis points from the previous year of 6%, driven in part by the tax reform reinvestments mentioned previously, which had 120 basis points impact. While we are still facing headwinds on the startup at our West Coast production facility and new product startup cost at Forest City, we have made steady progress over the last two quarters. Motorized backlog increased 31% or just over 500 units, reflecting the strength of our recently introduced new product. Turning to our balance sheet as of the quarter end, the Company had outstanding debt of $260 million. Net of debt issuance cost of $8.2 million, reported debt was $251.8 million. Working capital was $183.4 million. Our current net debt to adjusted EBITDA ratio is 1.2 on track with our deleveraging commitment and in line with our targeted leverage ratio range of 0.9 to 1.5. Cash flow from operations was $61 million in the first nine months of fiscal 2018. We repurchased $5 million of stock in the quarter. Our effective tax rate in the third quarter was 26.4%. For the year, we expect the Tax Cuts and Jobs Act rate impact to drive gross $0.25 to $0.30 tax benefit. Net of the reinvestments we are making, including the employee distributions and the Winnebago foundation contribution discussed earlier amounting to $0.11 to $0.12 for the year, we expect the tax reform to contribute $0.15 to $0.18 per share benefit that would flow to shareholders. Finally, our Board of Directors recently approved a quarterly cash dividend of $0.10 per share payable on July 05, 2018 to common stockholders of record as of the close of business on June 20, 2018. 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 open it up to Q&A, I want to provide an update on the industry and touch on some of the exciting recent developments at Winnebago Industries. Regarding the RV industry, we continue to believe that 2018 will be a positive year for North American shipments in retail. While the past eight years have been tremendous in its annual double-digit unit shipment growth, we do subscribe to the recent RVIA 2018 shipments forecast projecting an approximate 7.5% increase in 2018 versus 2017. This is yet another shipment record projected as more consumers find the appeal of the RV lifestyle the right choice for their discretionary investment. Dealer sentiment remains stable, and we believe that Winnebago Industries’ inventory levels also remain at appropriate levels given the current state of each of our businesses. We continue to monitor Winnebago Industries’ dealer terms and aging inventory very carefully, and are pleased to report that those factors are stable for our business at this present time. While the elongated winter certainly affected the first two-thirds of quarter three retail, the trends driving growth in the overall RV market and outdoor lifestyle pursuits more broadly remain firmly in place, and retail activity in late spring early summer exhibited some welcomed energy. Despite the challenges associated with the recently enacted foreign steel and aluminum tariffs, macroeconomic conditions remain conducive to positive RV industry growth and in-customer product utilization through the rest of calendar year ’18. Though, we are always of course on high alert for developments on the economic front, such as rising interest rates, rising fuel prices and monitoring consumer sentiment. It is undoubtedly an interesting time in American and global business as there is increasing volatility in these macroeconomic factors, not all of which is triggered by normal supply and demand elements. In terms of recent developments, late in the third quarter, we announced the launch of an all-electric zero mission commercial vehicle platform through our Specialty Vehicles division in conjunction with strategic partnerships with Motiv Power Systems, a U.S. leader in medium duty electric vehicle chassis. We will be working with Motiv to develop and supply electric power chassis in our specialty vehicles business and keeping with our key priority of investing in new technologies and innovations that could be important to the enterprise in the future. We believe that all electric vehicle applications will continue to evolve to meet numerous market needs, and we look forward to participating in this space actively going forward. Our specialty vehicles business is a small division of Winnebago Industries, but one we are carefully assessing for increased investment. Additionally, as I'm sure you've all seen earlier this month, we announced that Winnebago Industries acquired Chris-Craft, an iconic recreational boat builder, enhancing our portfolio and diversifying our position as a premier outdoor lifestyle company. As you know, one of our key strategic priorities is profitably diversifying Winnebago Industries beyond the RV market, and we believe they Chris-Craft and the Marine market are an ideal initial step towards doing so. The legendary Chris-Craft brand shares many similarities with our own heritage Winnebago flagship brand. And its strong brand -- Chris-Craft’s brand, its high quality product lines and premium position in the market make it a natural fit for us. We believe the Marine market has significant runway for growth and significant overlap with the RV market in terms of customer demographics, lifestyle and ownership crossover. The Marine industry is growing as well and increasingly attracting new boaters. We’re very pleased to have the talented Chris-Craft employee team on-board, and look forward to continuing to drive improved profitability and shareholder value with a broader and more balanced portfolio of outdoor lifestyle products. We want Chris-Craft dealers and customers and employees to know that we intend to work very hard with the leadership team there to nurture this wonderful brand and grow its presence in the Marine market in a disciplined yet exciting manner. With that, I'll wrap up my comments for today. I'm sure we'll have a few questions, and so will get on with that soon. I would like to end, as I always do, by thanking all of our Winnebago Industries’ employees for their hard work during the quarter, and for their continued commitment to providing all of our customers with high quality products and services. We have been working extremely hard here at the Company to ensure our employees, our shareholders and owners of Winnebago Industries, and that we create further avenues for them to express how we can become an even better employer. At the end of the day, it wil l be our people that make all the difference in differentiating our value proposition for the end customers and our dealer partners. We are committed to ensuring our employees make our organization their preferred place to continue and finish their careers. Thanks very much for your time this morning. I wish all of you and all of the Winnebago Industries’ team a great and safe rest of your summer. We will now turn the line back over to the operator for questions.

Thank you [Operator Instructions]. Our first question comes from Craig Kennison with Baird. Your line is now open.

Question on the motorhome margin trajectory, you’re showing some signs of improvement sequentially. Wondered if you could comment on some of the factors influencing margin there, especially as you think about your long-term 2020 plan, which would imply much better margin there? Trying to really unpack the commodity impact along with your operational improvements and some of these one-time costs as well?

I gave you some of the facts, the numbers affecting margins in the quarter, including that one-time distribution, call it the tax benefit, and the 120 points of that, that hit during the quarter. Going forward, we’ll continue to monitor the inflationary pressures that we’re seeing from the tariffs . I think that that's the biggest unknown for many companies today, and we’re no exception, how the tariffs or the threat of additional tariff and a threat of trade war affects spot markets here domestically. As a reminder, we buy nearly all of our aluminum and steel domestically here, but yet, it still impacts the spot market. So it's a bit hard to foretell what’s going to happen in the spot prices. What I will say is that we continue to do a very good job of assessing the impact in the near term, and then reacting with our suppliers also, working with them in partnership. To mitigate those cost increases and to then also pass along pricing, which we did early in the quarter to mitigate any net impact. So I’ll just make that statement upfront as it relates to tariffs. We’re doing a pretty good job managing through it so far. As it relates more specifically to motorhome and some of the investments we’ve been making there that we’ve talked about in past quarters, including most notably the West Coast facility startup and our new line in Forest City. Those investments are continuing, they are improving in terms of the productivity gradually each quarter. And so we are seeing those in our metrics, those improvements in our metrics. And we expect it to continue to be a gradual improvement over time. We’re still not where we were a year ago. We highlighted that in the numbers when I reviewed them, but we’re improving sequentially, which is something obviously that we are focused on doing. But that's -- as Mike alluded to in his comments, it's a long-term journey it's not a quick fix. And so that's what we will continue to emphasize. We've got great teams working on the initiative of profit improvement, cost take out and got confidence that we will continue to show improvement going forward.

And as it relates to your production capacity, really a couple of drivers; number one, you’ve added more capacity in Towables, which you’ve discussed; but you also have different numbers of days that you might work. I guess, how much more capacity do you have this year in Towables versus last year? And secondly, would you expect to go back to a normal work schedule which might include an additional week off this summer in terms of your work schedule?

I'll address that question, and really we do look at it across each of our three different RV businesses. The Motorized side, we are really focused on operational efficiency and productivity, cost management. And we believe we have run away within our existing facilities in North Iowa and Oregon on the Motorized side to return to a growth trajectory in the future that competes more effectively for higher market share. And that should not take significant capital investment if we do that correctly. But the Towable side, obviously, are the two businesses that are growing rapidly from a unit standpoint, and I'll start with a smaller one, Winnebago branded towables. Really what's been exciting in Indiana around the Winnebago branded towables business is that their growth over the last really two years essentially almost doubling that business is that we’ve really achieved that mostly organically within that campus. And this quarter, we started to break ground on a new $12 million, $13 million facility expansion project on the Winnebago towables campus. But we will really not start to reap the benefits of incremental capacity expansion there until sometime in the fiscal '19 year. And so that team there is doing a good job organically, continuing to get the right amount of production out of existing infrastructure for now. The Grand Design business, when we acquired Grand Design in November 2016, we knew at the time that in order to support the continued momentum of that fantastic brand that we would have to work with that team to continue to invest capital. And we have done that. And we've done that over a number of different projects. And we're really starting to see the benefits of that at Grand Design. And so unfortunately, I don’t have an answer right at the tip of my tongue in terms of exact capacity year-over-year, but it's obviously exhibiting itself in the numbers within the businesses, both organically through productivity but also inorganically through capacity expansion. And so we believe we have runway within the existing campus at Grand Design for more growth, but we are also prepared to continue to expand that business’ capacity to support their growth needs in the future. And we'll share that with you going forward. But that is definitely something that we talk about very regularly. And your question about workplace schedules. We really don't share our workplace schedules publicly. We work hard to respect obviously the needs of our employees to have time with their families and away from the business. And certainly, throughout the year take some down time, especially around major holidays, so that those employees can re-energize a bit. And we really don't compare our production schedule to anybody else in the industry. We’ll run the production schedules that each of our leaders see fit and we’ll manage our production output very carefully to the retail trajectories in the business. And so we believe that our teams are managing that appropriately right now, and will continue to do so.

Thank you. Our next question comes from Seth Woolf with Northcoast Research. Your line is now open.

I wanted to start off, Mike, we were talking about retail in 3Q. I think you used the word healthier to describe late spring early summer retail trends. I’m hoping you could quantify what acceleration you've seen?

Well, I would tell you that -- this is my own perspective and I certainly don't speak for the entire industry. You all have access to some of the SSI data on a lagging basis in the RV industry. And so you see the same SSI data for the industry that we see. But for our business, I would characterize March as a somewhat typical March it’s late in the winter early spring. And our businesses were relatively on track with where we thought they would be. April was a much more difficult month. I thought for our businesses, but also probably for the industry. And I think a lot of that was due at least early in the month to some of the weather above the Mason-Dixon line that was not as warm or as dry as I'm sure most of the RV dealers would have liked to have seen. Major retail for us was back to a more normal pace I think, and it was increasingly so throughout that month, each of the weeks got a little bit better comparatively. So that's how I would describe it. We obviously our focus on our own business and our own dealers and our product lines, and again in the Towable businesses, we have two businesses that are taking share on a regular basis. So we know that we’re exceeding the pace of the industry there. Motorized, we've been very upfront that you we’re trying to essentially stabilize that business as we make the product line healthier and pivot back upwards on market share growth. And in some categories, like Class B, we’re doing a great job of taking share there still. Class A, we think we are closer to stable there than we have been in a long time. And we have work to do on Class Cs and Motorized. Our performance there has not been exactly as we would've liked. So a broad answer to your question but we hope that the next 90 to 120 days of retail here during the summer and early fall are positive as I think most of the RV industry is projecting it to be.

And then as we think about inventory, I know you called out the fact that you feel really good about your inventory, all the metrics used to measure that are trending in the right direction, or at least they’re stable. If we look around the industry, some of your peers they have very high inventory level. So I guess maybe could you speak to how you can have confidence or what gives you confidence that the two businesses in towables you have that are at least firing on all cylinders. Do they have really differentiated enough where if some of the competitors are little heavy on inventory, you can continue to put up the results that we’re seeing now? Any color there would be helpful.

No, we certainly recognized that on paper, our dealer inventory levels on our Towable segments appear, and are significantly higher than they were a year ago. But as we continue to maintain, we think that is more a function of probably three major factors. One, we continue to carefully add new dealers and at times even upgrade dealers. And therefore, that action at times creates an opportunity to get the appropriate amount of inventory on that dealers’ lot. Number two, we’ve continued to introduce new products to the market in a steady pace. And so we are still in some cases appropriately filling the pipeline for anticipated and real retail on those new products. And then third is, especially in the case of Grand Design and certainly as well on Winnebago, those teams are earning more lot share from the dealers gaining market share. And slowly but surely, dealers are giving Grand Design and Winnebago more of their lots on the towable side and that also comes with the opportunity for increased shipments. And so we obviously have a little bit of awareness via some of the -- probably more of the inventory finance companies views of overall industry estimated retail and certainly read some of your reports and others as to what the projections are. But we really stay focused in our businesses. This is not a business where dealers are franchised. And so we recognize we have to compete and earn their business every day. And if they are heavy on inventory on non-Winnebago Industries brands, that could have an indirect impact certainly on us over time, as those dealers focus on working that inventory down before they potentially reorder or take some of ours. But we really haven't seen a lot of that on our own business but we also recognize that the industry is in a transition from a double-digit shipment growth industry to probably something in the mid high single digits, as RVIA is forecasting this year that 7%, 7.5% range. And I think that transition will come with some normal adjustment by manufacturers and the channel to make sure that they adjust to what that new normal rate is. But as you can see from our third quarter results, we’re working through that and we’ll continue to try to do our best in Q4 and in fiscal '19.

Thank you. Our next question comes from Stephen O'Hara with Sidoti and Company. Your line is now open.

It’s [Frank] on for Steve. I just had a question, just on the Motorized. Obviously, revenue was up and backlog was strong. I know you talked about success of the new products there. But I was wondering if there are any other drivers that we should think about on that side of the business?

I think those probably capture it. The Motorized business is one that certainly gets a lot of attention from the financial community, and one that we’re focused on here. We continue to work with our dealers carefully there to ensure that the inventory on their lots is of a healthier assortment of our new and our active products that we’re manufacturing. And our Motorized team is doing a better job of bringing some new products to the market. I mean, literally within the last 12 to 15 months, we’ve introduced a new Class A Gas Intent, several new models on the Class A Gas Vista. We’ve been doing work on the diesel side with the introduction of the RV of the year, the Horizon. The Class B category has been extremely busy with the introduction of the Revel, some great work on the Travato. And then on the Class C line, I talked about the outlook in my comments, but also some good work on other parts of that line and much more work to do there. Class C is probably the category that we have fallen behind the market at this point that needs some continued attention. But I would just say it’s just a slow climb back to earn dealer confidence with better products. And the backlog is hopefully reflective that they're interested in some of those new products. We have to continue to make sure that our operations side can make those profitably and efficiently, and so we can serve the market. There have been several of those products, the Horizon and the Revel, where we’re seeing good initial demand. But for various reasons, we haven't been able to meet that demand as well as we would have liked and that’s frustrated some dealers. But they’re hanging with us and we believe that we’ll do a better job with that in the future.

And then I just had one quick other one. You mentioned some price increases, partially offsetting some of the inflationary costs. I was wondering if there’s anything that’s been put in place recently that maybe hasn’t hit third quarter yet? And how you think about the timing on that?

Well, as you know, we’re three or four weeks here into -- I guess, three weeks into the month of June and our fourth quarter. So we won’t certainly talk about anything that has happened after the third quarter really on any part of our business. But there were some price increases taken across the businesses during the third quarter. And in more stable times within the RV industry, you can manage your price increases to a more limited amount throughout the year, maybe hopefully one-time a year, or when you introduce some new products. We are in such an incredibly volatile and dynamic cost period in terms of the volatility of the material costs that our pricing strategies and actions have to remain nimble as well. And we know that’s difficult for dealers and certainly difficult for end customers as well. But we’re monitoring costs on almost daily basis, and really working hard each week, each month to determine if the pricing in the market that we have today is one that is fairly shared across the different members of the value chain, suppliers, dealers, OEMs. And we've made more frequent price adjustments this fiscal year than we probably have in the last three or four fiscal years. But I think that's part and parcel with the climate that we’re in right now.

Thank you. Our next question comes from Scott Stember with C.L. King.

Just a question on -- I mean obviously you guys did a great job of continue to do with price increases, and I guess all the things you talked about, navigating this raw material environment. Could you maybe just go into a little bit more depth on how the process works? Obviously, I think it's clear that a fair amount of price increases have gone through, but also you are working with your suppliers and you are becoming more efficient. And how that process works? And when you going back to your suppliers and -- because it seems that if you were to add back the get back that you give to your employees, and your gross margins obviously were significantly higher than a year ago. So it’s clear that you guys are getting it done. It's clear that the end customer seems to be accepting the price increases. Just trying to figure out the whole dynamic how it works. And I know there's a lot of moving pieces, so maybe just go into that a little bit more.

Scott, you're right, there are a lot of moving pieces, and it’s a dynamic environment that we're in. It starts with the supplier relationship. Obviously, as despite the pressures from the material cost increases their first order business is try to mitigate them themselves. But then they'll come to us and talk to us about the pricing that they feel that they need. And we’ll engage in a conversation or even in some cases pretty stiff negotiations on that. And also look for with them as we go through those discussions, on a component-by-component basis, how do we take costs out together, what are some of the non-value pieces of the cost in the eyes of the end customer that we can jointly engineer out. And that's never as quick of a fix, but it's still something that we aggressively pursue. And then also as we are working on our floor plans and as we change out componentry, look for viable substitutes of whether you're talking about a kitchen sink, a refrigerator, a television, there's always opportunities to look at more economic solutions to try to offset the natural cost increases that occur. And so that's going on a daily basis as our engineers are looking at redesigning floor plans and coming out with tweaks to things. They're always looking for ways to cost out some of the parts, and that’s a contributor to the mitigating effect as well. And at the end of the day, as Mike just alluded to and as he commented on, the pricing decisions, we're trying to remain very fluid and our processes for rolling price increases to the dealers in a way that's clear, they understand what we're doing, and can pass it along to customers. And we hope that the end markets continue to support the RV lifestyle and that the price increases that we are pushing through, while higher than the past, are still quite modest in the grand scheme of things, because of all the other actions that we take. So I guess that's how I'd characterize the process, Scott.

Scott, I'll add one other thing and I just -- because I want everybody to know that. We take very seriously any price increases that we ask of the market. We very consciously think about those and recognize what the short-term and the potential long-term impact of that, and we recognize that we're in a consumer discretionary product arena. And I think the RV industry, over the last 10 years, has done a generally fantastic job of managing cost and keeping the RV lifestyle affordable. One of our very real concerns with the tariffs and really the overall trade work climate that is building is that ultimately the North American customer in this case will end up paying for those tariffs in that trade war. And that will make those end customers have to -- it will force them to make choices on where to spend their discretionary savings and dollars on. And we certainly want to keep the RV lifestyle moving in the right direction in terms of demand, but we also take very seriously the price increases that we ask of the market, because we’re fully aware that they could have an impact in the future in terms of slowing demand. So we’ll look on anxiously as everybody else does as to how some of these topics are resolved.

And now on to the Class C, the Outlook, I know that product is just getting out there right now. Were there any sales of the Outlook in the quarter? And clearly, it’s in the backlog. Correct?

There were a few sales in the quarter, and there certainly are orders in the backlog. But as we talked about, this was an introduction that happened late in the quarter. And we’re always careful to overemphasize any one new product in our portfolio that just happens to be the latest example of the Motorized business that's working hard to turn its product line over. And so we’ve got more work to do on Class Cs in addition to the Outlook. There are several other products there that need to be improved or refreshed. And we’ve got some things happening there that we’ll share with you all in the future. But the Outlook is definitely the latest new Class C product and one that where our sales teams are working hard to earn placement of in the market.

And last question on Chris-Craft, on the boat side. Obviously, you see equally iconic brands as the Winnebago brand and they are very good at what they do. But what do you envision as you give them the ability to expand capacity, and potentially come out with some new types of -- both either be pontoons or what not. So maybe just talk about brand expansion or product type of expansion. What you envision the future as you get your hands on Chris-Craft and allow them to expand?

Well, Scott, we’re very excited obviously about the addition of Chris-Craft to our portfolio. And part of the reason why we ultimately consummated that transaction was that this team had an existing growth plan that we ultimately believe is [technical difficulty]. And I think as we stated several weeks ago when we made that announcement, it includes a number of components, including organic elements but also some inorganic elements. And really the first wave of growth for Chris-Craft in the, I guess, the Winnebago Industries ownership era is more on the organic side. They are working very hard every day to strengthen their dealer base. They have models within their existing product line that they would like to continue to make more of. We have some short-term capacity expansion opportunities that we think we can work with their leadership on, obviously, to get those rolling. And then as your question infers, there's always the opportunity, as we stated, to look at some other segments of the Marine business with that brand, or potentially with another brand in the future. But I would tell you that that is probably a secondary priority as we begin the integration process. It's possible but not one we’re actively working on right now. The Chris-Craft team has a number of growth ideas that are more imminent in the short-term that we can help support. But it’s certainly an opportunity in the future to consider. The great thing about the Chris-Craft brand is, not unlike the Winnebago flagship brand, it has the permission to participate from end customers. And hopefully, many of the dealers in a very disciplined expanded part of the Marine market. But again, that's a strategy for us to talk about at a later time.

Thank you. Our next question comes from Gerrick Johnson with BMO Capital Markets. Your line is now open.

First, just to be clear, the $4.7 million bonus and donation to the foundation, that’s all in cost of goods sold or is that broken out between COGS and G&A, because G&A was up nicely?

Yes, some of it does show up in G&A as well, Gerick, it’s split between both.

Can I go 50-50 and call it a today?

Little bit more heavily weighted towards cost of goods and SG&A.

And then that leads me to next question, given the discussion on inputs and input inflation. It would be helpful if you remind us what the breakdown of your cost of goods sold are broken down between overhead, inputs, labor, warranty, et cetera.

Yes, it’s clearly, most heavily material. And then labor and overheads are pretty comparable to each other.

And then my last one is again Chris-Craft. Just some numbers please. What do you see as the annual run rate of sales? What has it done in the past, because honestly we’re going -- all going to try to model it. And it will be nice if we can all model it going in the same direction. Thanks.

Yes, I think we understand the request for some more information there. And certainly, as that business grows, that will probably become a bit more visible. We acquired that business at the beginning of Q4. And at the end of Q4, you will have the opportunity to look at probably a little bit different reporting segment structure that will have Chris-Craft most likely put into in other reporting segments. And that will give you a little bit better idea probably of the size of the business. But it's just something right now that we’re not disclosing. But I think we've been very transparent that at this point, it's a very small single-digit element of our portfolio again, starting with fourth quarter of fiscal '18. And we believe that it's a business that obviously can grow in the future. We are not looking for distressed businesses to buy, especially in non-RV arenas. We love the brand. We thought the leadership team was very capable. We think that the way they approach the market with their dealers and the types of products are very similar to the business models that we’re trying operate on the RV side. And we think they have, as I said earlier, they have a viable growth plan to dramatically grow their business in the future. And so we’ll start to get to work with that team, and we’re two and half, three weeks into the integration and all things are going well. But that’s what we’re sharing at this point.

Thank you. Our next question comes from Greg Badishkanian with Citi. Your line is now open.

It’s actually Fred Wightman on for Greg. Mike, I think last quarter you had offered some cautious commentary, just looking at the industry-wide capacity that was coming online and then in turn, what that could do for OEM productions. We've seen some of that capacity start to come online. Is there anything in the market that makes you either more or less comfortable versus last quarter?

Well, I think the overall RV industry has had significant awareness of the transition that I talked about a little bit earlier. This is a tremendous industry one that is becoming more mainstream and more popular with the American consumer. I think the RV OEMs in partnership with the suppliers and the dealers have done a great job in the last decade of making the RV lifestyle more attractive. And we’re working hard on new products, but I'm also excited about some of the aftermarket and service initiatives that the RV industry is working on, including the announcement recently jointly by RVIA and RVDA of the RV Technical Institute that we’ll be getting going here in Indiana in the future. And that's really important to make sure that we have enough service technicians working at the dealers and independent service centers to take care of all the customers that have come at end of the lifestyle. But I think the last 90 days, especially almost all elements of the RV industry, are fully engaged in this transition from a double digit growth industry to one that will still grow but probably grow, as I projected earlier, in line with RVIA forecast for ’18 in the mid to mid high single digit range. And we’ll see what 2019 and ’20 bring. So I think people are all engaged in making decisions that are right for their businesses. And dealers are great partners, I am sure to all the OEMs, but they're not shy about giving feedback as to what they're seeing from end customers and their inventory level. So I think we’re all trying to take care of our own house and move forward.

And then I think you mentioned dealer sentiment was stable for Winnebago dealers, but when you speak with dealers, either anecdotally or in a more quantitative manner. Is there anything that you think will defer meaningfully as we transition to the back half of the year that fall in terms of order patterns or inventory builds?

Yes, I do and in some ways, I think it's a good thing. In the last couple years, RV manufacture capacity was racing to keep up with demand. And so dealers were trying to do their best to keep their lots full of the right products, and to make sure that they didn't lose retail. And many dealers, to be fair to them, were frustrated with OEMs with decisive backlogs that were being generated. And the fact that the OEMs could not fill those backlogs as quickly as the dealers would like. We think that situation has certainly improved in the last six months with other OEMs capacity coming online and their ability to work their backlogs down. As we talked about early in the Q&A session here, our capacity expansion efforts are still active and we continue to do a little bit better job of filling the orders in a more timely basis. And so I think dealers will -- and especially in the fall time period as we approach the open house in Indiana, which is in the third week of September and generally one of the larger buying periods for dealers. I think they will walk into that -- that show with a mentality that the products that they order are the right orders for a reasonable time in the future. And they'll expect fill the end to be able to fill those orders in a reasonable time as well. And so I think the industry has climbed up a bit with that order frenzy, and so that will stabilize a bit here in the future. The good news is if retail remains positive, the flywheel will keep spinning, and certainly that's what we're all hoping for.

Thank you. Our next question comes from David Whiston with Morningstar. Your line is now open.

On Chris-Craft, can you just talk a little bit about boating and its relationship to your customers? Is it the top activity or top two or three activities that your customers do? And then I know you want to integrate it of course. But are you interested in some other outdoor lifestyle things like fishing and hunting?

Throughout the due diligence process around Chris-Craft, we certainly try to work hard to understand the correlation between a boater and an RVer. And we were pleased that we did find a pretty reasonable and positive correlation between those two lifestyles. I continue to tell people that both the boating industry and the RV industry are similar in the fact that you generally do those activities with family and friends. And there are multiple use cases within each industry, you can go fishing, you can go wakeboarding, you can take a cocktail cruise during the sunset time. And in the RV industry, you can use your RV for many use cases as well. But it’s almost always around -- being around family and friends. And so we did find a correlation between RVers and boaters in a positive way. It’s certainly not one-for-one but it was a strong enough overlap that we felt like that was in a strong adjacency lifestyle wise. And we'll be very careful about trying to drive synergy through that correlation. The dealer bases are largely separate but there may be some opportunities for us to, maybe from a marketing standpoint, promote both jointly together. So that is something that we'll continue to look in on.

And on the price increases, can you get a little more specific as to where on the product portfolio these are going. What I am getting at is where do you have some leeway to raise prices? Is it more in towables or just in Winnebago branded towables? Or is it just in say [BMC] Motorized. Any more detail there is helpful.

I don't think we'll signal via public comment here where we think we have more room to take price increases more than other parts of the line. As I mentioned earlier, they're serious no matter where we take them. Certainly, your lower-priced products are a bit more sensitive to both the cost inputs. And it's not just material costs, even the transportation costs for these products. Both motorized and towables have increased as well. Gas prices are a little bit higher certainly than they were a year ago. And so we’re seeing pressures. But I would say our pricing activity has been targeted at times to some models that we believe that the retail market can bear that. And at times it's been necessary to look at a broader part of the line, because the costs are just agnostic to what the model or brand is on it. And so we -- again, we really don’t look to take more price increases in the future on our own, per se. We’ll see what the cost environment does. And as Bryan Hughes described earlier, our first obligation to the end customer and the dealers is to try to do everything we can ourselves and with our suppliers to mitigate that and drive higher productivity before we pass those on. And so time will tell as to obviously how much more we need to continue to do.

And just one more question from Bryan. Can you comment on how much of the Chris-Craft consideration was new debt versus cash on hand?

It’s a mix of both, and we tapped our ABL in the short-term. We’re evaluating whether we want to take on or explore more permanent forms of debt to pay that down. I will also say on the topic of Chris-Craft, just for the benefit of everybody, you didn’t ask as a question, but I think it’s important. In Q4 with the transaction cost that we are anticipating with the deal, we expect about $0.04 to $0.05 charge in Q4 related to the Chris-Craft deal. So I know you’re all modeling what things look like going forward, and that’s one important input I think that you should be aware of.

Thank you. We have a follow up question from Seth Woolf. Your line is now open.

Mike, you mentioned a couple of times transition from a double-digit environment to mid to high single digits. I think you're referencing the RVIAs forecast. Just wondering how do you think about the transitioning with retail sales? And then if there is a transition that occurs, are there any categories that are better positioned to handle this transition? Stick-and-Tins, laminated trailers, fifth wheel, toy haulers, et cetera. And where does Winnebago, broadly speaking, play in these categories? Thank you.

I’ll try to work through that, everything starts with retail. So as the industry transitions from a higher growth rate to a more moderate growth rate, one that’s still very positive we believe inevitably that is driven by the retail activity. So retail comps year-over-year in the RV industry will certainly begin to moderate a little bit, and probably already have, and some of that is the logged of numbers. It's just harder to put double-digit retail on 540,000 unit industry than it is 350,000 unit industry six or seven years ago. So again we believe that that we will moderate. Again, we think the RVIA shipment forecast in 2018 is, I think, a reasonable one. The 2019 RVA forecast is materially different than that, but we’ve all got time to see how this plays out. As far as what parts of the line that that could impact more, that’s a bit of a dangerous question in the sense that I spend so much time looking at our businesses that I probably spend less time really diving deep into the complete industry data, meaning what some of the other competitor strengths are. For example, we have such low share in the Stick-and-Tin segment and our Grand Design Transcend is doing a very nice job, starting to gain a foothold in that category. But we’re still a very small player. And so if that segment is impacted more materially, good or bad, that doesn’t affect us as much in our current form. Hopefully, it will affect us a little bit more in the future. So if you just look at cost as a percent of the bill of material costs and their retail prices, one could surmise that the lower priced products are probably going to be faced with a little bit higher increase in material cost or transportation costs. And for those companies that are little bit more prevalent there, that maybe a little bit bigger challenge. But I don’t want to comment any further on that, because we really focus on our business.

Thank you. I am not showing any further questions at this time. I would now like to turn the call back over to Steve Stuber for any further remarks.

Great. Thanks everyone for joining our call today. We certainly look forward to speaking with many of you throughout the quarter. Thanks, and a have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone, have a great day.