Winnebago Industries, Inc. (WGO) Q4 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the fourth quarter 2018 Winnebago earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given 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 call, 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 fourth quarter and full year, which ended August 25, 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 fourth quarter and full-year earnings result was 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 may be considered forward-looking statements under securities laws. The company cautions you that forward-looking statements involve a number of risks, and are inherently uncertain in a number of factors, many of which are beyond the company's control, could cause actual results to differ materially from these statements. These factors are identified in our SEC filings, which I encourage you to read. With that said, I would now like to turn the call over to our President and CEO, Michael Happe. Mike?

Thank you, Steve. And good morning to those on today's call. We truly appreciate your time and your interest in Winnebago Industries. We will begin this morning with an overview of our company's continued transformation in fiscal year 2018, highlighting specific key drivers of our performance in the fourth quarter. We will then turn the call over to Bryan Hughes, who will provide more detail on the related financial results. I will return to offer some closing comments as we embark on an exciting fiscal 2019 year. More than two years ago, in June of 2016, we began to share with our employees and external stakeholders a new vision statement here at Winnebago Industries. We stated our ambition to be the trusted leader in outdoor lifestyle solutions, by providing unmatched innovation, quality and service in the industries we engage. We then set about with tremendous focus on five key enterprise strategies that we remain committed to today. Number one, build a high-performance culture through a unique blend of leadership, accountability, and giving. Fiscal year 2018 saw continued investment in strengthening and deepening a broader group of key leaders at Winnebago. We delivered on our quarterly and annual commitments to our shareholders by consistently meeting and exceeding their financial expectations. And we accelerated multiple initiatives to give back to the communities that our employees live and work in. Our second strategy was strengthening and expanding our core RV business, by both resetting our motorhome direction and investing significantly in the growth of our towable segment. Fiscal 2018 represented a stabilization of our Winnebago gas motorhome performance in the market, led by our expanded leadership position in the fastest-growing segment of motorized RVs, that being Class B vans. We are especially pleased with the 2018 results and continued momentum of our two towable businesses – Grand Design RV and Winnebago-branded towables. Combined, no other RV company in North America organically gained the towable share we did this past fiscal year. In two short years, our consolidated RV retail market share has risen from under 3% to almost 8.5% in North America. Our future ambitions are much higher. Our third strategy is to elevate excellence in operations by driving higher levels of employee safety, product quality and overall manufacturing productivity. We made material progress in fiscal 2018 on all three of these operational priorities. Our commitment to a safe workplace resulted in meaningfully lower levels of recordable injuries and lost service, we reduced our consolidated warranty as a percentage of net sales in fiscal 2018, and increased first pass yield on many of our manufacturing lines. And we achieved strong output results from capacity expansion projects in Indiana and daily productivity gains across all of our campuses. Our fourth enterprise strategy is to leverage innovation and digital engagement, working to create stronger connectedness with our customers. Winnebago Industries raced to the front of the pack on electrification in fiscal 2018 with the introduction of an all-electric specialty vehicle platform via its partnership with Motiv Power Systems. We invested in new internal technology to better serve our aftermarket motorhome customers, and each of our RV businesses advance the presence and effectiveness of smart technology within select products in their lineups. Our fifth and final enterprise strategy is to expand to new profitable markets, creating a more diversified business model. In June of 2018, in our quarter four, Winnebago Industries validated its intent to build a premier outdoor lifestyle company through the acquisition of Chris-Craft, the premier global brand in luxury boatbuilding. Adding another iconic asset to our portfolio, the Chris-Craft deal represents our initial entry to a new industry – marine – that has many similar long-term secular growth characteristics to the RV industry. We have strong intentions to grow the Chris-Craft business and brand across the globe and travel the learning curve expeditiously in the marine segment. In fiscal year 2018, we reached $2 billion of revenue for the first time in our company's history and recorded more than $100 million of net income, another all-time record. I want to thank all of our hard-working Winnebago Industries’ employees for their efforts over the year and their dedication to providing our customers with an extraordinary experience as we continue to grow our company. We embrace the cliché that says “our desire isn't to be the biggest, but to be the best.” We have lots of work left to do, but our team is extremely energized about our future. We enter fiscal 2019 a larger, more diversified, a more profitable organization, poised to continue a growth pace that exceeds that of the industries we compete in. Organic sales growth remains strong and profitability continues to increase. Full-year fiscal 2018 consolidated revenues increased 30% over fiscal 2017, with strong organic growth driven primarily by the towable segment. Profitability continued to improve with overall gross margins ending at 14.9%, representing an increase of 50 basis points over fiscal 2017, driven by continued accelerated growth in the towable segment and successful management of cost input pressures through select product cost increases and supplier partnership negotiations. Turning to the segments in more detail, in the Towables business, our growth continues to outpace that of the industry as the unique appeal of our Winnebago branded and Grand Design RV products enables us to reach a broader customer base. For the full year, revenues increased 26.2% over fiscal 2017 and adjusted EBITDA margins expanded by 80 basis points. While unit backlog for the fourth quarter declined 4.4% over the prior year, reflecting in part the increased capacity we brought online to meet demand and help reduce unsustainably high backlog levels, we did see our Towables dollar backlog continue to increase, growing more than 6% on the back of a favorable product mix. Our capacity expansion projects in the Towable segment reflect our continued commitment to making smart strategic investments in the business, especially enabling Grand Design RV to better meet demand and convert more of our backlog into sales around that business. We also broke ground on an additional facility for the Winnebago-branded towables line in fiscal 2018, one we expect to bring online in early calendar 2019. Turning to the motorized segment, we continued to make steady progress against our efforts to transform the motorized business. For the full year, revenues were up 0.9% from fiscal 2017. And while adjusted EBITDA margins contracted by 250 basis points, we were encouraged to see a sequential adjusted EBITDA margin improvement in the fourth quarter of 100 basis points, reflecting the impact of our continued efforts to improve operational efficiency and implement pricing adjustments to account for rising input costs. The motorized team spent significant effort in fiscal year 2018 strengthening its industry-leading Class B lineup and investing in more affordable Class A gas and Class C products. We are making strong strides in improving the feature set and visual appeal of our line. We also remain pleased with the stability and a positive comparison of our motorized backlog, both units and dollars, versus a year ago. The largest source of market and financial pressure for the motorized segment in fiscal year 2018 came squarely from the Class A diesel category where our manufacturing and supply chain challenges surrounding our Oregon facility affected both product availability and our motorized gross margins, especially in the first two quarters of the year. This manufacturing line, the product line and the facility remain a strong focus for the division in terms of improvement going forward. During the quarter, we also realigned our operating segments following the Chris-Craft acquisition. And now, we’ll have two non-reportable operating segments – marine and specialty vehicles – and certain corporate costs combined together in an Other reporting category. Bryan Hughes will provide more detail on this shortly in his comments. We are very pleased thus far with our progress, bringing Chris-Craft into the Winnebago Industries family and introducing the rest of our team to the marine market. Our assimilation efforts there are off to a good start and we've made good progress integrating key backroom functions such as finance, human resources and IT. As we move forward, we are excited about implementing our growth plan for the business facing the customer, which includes driving new product development and organic growth through line extensions, improving manufacturing efficiencies, expanding our reach by improving the quality and quantity of our dealer channel, and supporting Chris-Craft’s growth with even stronger brand and marketing development efforts. We are committed to careful stewardship of the iconic Chris-Craft brand and we look forward to sharing more information on our overall marine market strategy in future quarters. With that opening overview, I will now turn the call over to Bryan Hughes to review our fiscal 2018 fourth-quarter and full-year financials in more detail. Bryan?

Thanks, Mike. And good morning, everyone. Fourth-quarter consolidated revenues were $536.2 million, an increase of 17.9% year-over-year, driven primarily by strong organic growth of 26.2% in the Towable segment, but also aided by growth of 2.5% in the Motorhome segment. Gross profit was $83.8 million in the fourth quarter, an increase of 13.9% year-over-year. This increase was driven by the continuation of accelerated growth in the Towable segment, which now accounts for 54% of total revenues in the fourth quarter. Gross profit margins decreased 60 basis points, driven by higher input costs that were largely offset by cost savings initiative and pricing actions. Recall that we mentioned last year a favorable inventory adjustment of $2.9 million or 60 basis points at the consolidated level. So, considering this in the year-over-year comparison, our underlying gross margin performance in Q4 was on par with last year. The impacts that the tariffs have had on spot prices for aluminum, steel and other impacted materials and the impact these increases have had on our gross margins have generally been mitigated with a combination of cost savings initiatives and pricing. Our approach has been to address each commodity and component impacted in a targeted manner, seeking substitutes where available, working with vendors to creatively solve challenged parts and components and adjusting the content of such materials where feasible and, ultimately, increasing prices on our units to counteract the cost increases. So far, these actions along with product and business mix and leverage from our strong revenue growth are proving to be sufficient to hold our gross margin. Fourth-quarter operating income was $45.7 million, up 5.1%, and net income was $29.8 million for an increase of 19.5%. Earnings per share were $0.94 per diluted share, an increase of 19% over our $0.79 in the fourth quarter of last year. Fourth-quarter results also include costs related to the Chris-Craft acquisition of $2.8 million or $0.06 per diluted share, including amortization expenses of $1.5 million related to the definite-lived intangible assets acquired and transaction costs of $1.3 million. For fiscal 2018, consolidated revenues were $2 billion, an increase of 30.4% from fiscal 2017, driven largely by strong results from the Towable segment and also annualizing on approximately two months from the Grand Design acquisition and the associated timing of the deal closing. Operating income for the fiscal year was $160.4 million, up 28.2%, and net income was $102.4 million for an increase of 43.5%. Full-year earnings per share were $3.22 per diluted share, a 39% increase from $2.32 in fiscal 2017. We have provided non-GAAP EBITDA and adjusted EBITDA performance measures in our press release as a comparable measure to help to provide further clarity into our performance. The schedules accompanying the press release show a reconciliation between net income and adjusted EBITDA. As those schedules show, consolidated adjusted EBITDA for the quarter was $53.6 million, an increase of 12.1% year-over-year. For the full year, consolidated adjusted EBITDA was $181.7 million, an increase of 30.9% year-over-year. Before I talk through the individual segments, as Mike mentioned in his opening comments, we have realigned our operating segments following the Chris-Craft acquisition. And while we still have two reportable segments in the Towable segment and the Motorhome segment, we now will have two non-reportable operating segments – marine, which is effectively Chris-Craft, and specialty vehicles – as well as certain corporate charges combined together in Other. The corporate costs include certain corporate administrative charges. Some of the more prominent examples include costs for the CEO, the Board of Directors, myself, the CFO, General Counsel and business development costs. The idea being that, as we diversify and grow the company and broaden our reach and portfolio, these corporate administrative charges are less tied to the specific segments and more associated with directing the enterprise. As a result of this new structure, the following segment comments regarding the Towable segment and the Motorhome segment reflect the retrospective restatement of both fiscal 2016 and fiscal 2017 in accordance with this new structure that we are introducing for fiscal 2018, such that all comparisons to past results are on a consistent or an apples-to-apples basis. I recognize that this wreaks havoc on your models for those of you on this call that are doing modeling of our results. And so, Steve and I stand ready to do everything we can to help you sort through this change during our calls with you over the next couple of days and make sure that your models are appropriately updated with this new structure in mind. Additionally, we have posted a document containing the reclassified revenues and adjusted EBITDA by quarter for fiscal 2017 and fiscal 2018 on our company's investor relations Web site. With those comments regarding the new structure in mind, I will now turn to comments related to the individual segments, starting with the Towable segment. Revenues for fourth quarter were $288.7 million, up 26.2% year-over-year, driven by continued strong organic growth across the Grand Design RV and Winnebago-branded Towable lines. For the full fiscal year, Towable revenues were $1.1 billion, up 64.6% from fiscal 2017. Recall that due to the Grand Design acquisition closing in November of 2016, we have 12 months of Grand Design results in fiscal 2018 compared to about 10 months in fiscal 2017. Segment adjusted EBITDA for the fourth quarter was $41.9 million, up 23.9% from the prior year. And adjusted EBITDA margins decreased 30 basis point, driven by cost input pressures that were more than offset by effective price increases, mix and cost reduction efforts. As I mentioned previously, we had a favorable inventory adjustment recorded in last year's Q4 numbers, impacting the prior-year results by $2.9 million in this segment, or by 125 basis points at EBITDA margin at the segment level. For the full year, segment adjustment EBITDA was $157.0 million, up 75% over the prior year. And adjusted EBITDA margins increased by 80 basis points, driven by cost savings initiatives, synergies from the Grand Design acquisition, and improved leverage from the strong sales growth. Turning now to the Motorhome segment, Motorhome revenues were $228.5 million for the quarter, up 2.5% versus last year. Growth in shipments of Class B and Class C product was offset by a reduction in Class A shipments. For fiscal 2018, Motorhome revenues up $860.7 million were up 0.9% year-over-year, driven by strong performance in our Class B Revel and Travato products, partially offset by our Class A performance. Segment adjusted EBITDA was $13.2 million for the fourth quarter, down 18.8% year-over-year. Adjusted EBITDA margin decreased by 150 basis points, primarily driven by the investments we’ve been making in this business and increasing input cost pressures that have not yet been overcome with net pricing actions. The fourth quarter adjusted EBITDA margin was 5.8%. For the full year, segment adjusted EBITDA was $35.5 million, down 37.2% year-over-year, and adjusted EBITDA margins decreased 250 basis points. Turning to our balance sheet, as of the fiscal year end, the company had outstanding debt of $291.4 million, comprised of $298.5 million of debt net of debt issuance costs of $7.1 million. Working capital was $167.8 million. Our current net debt to adjusted EBITDA ratio is 1.6, which considers the recent Chris-Craft acquisition and is on track with our deleveraging commitment and just slightly above our targeted leverage ratio range of 0.9 to 1.5. Cash flow from operations was $83.3 million for the full year, down $13.8 million from last year. While we had a nice increase in net income, the decline in cash flow from operations was driven by an increase in chassis inventory and timing on AP balances that benefited last year's cash flow. Recall also the non-cash income item of $25 million generated by the postretirement health benefit item in last year's results. The effective income tax rate for the fourth quarter was 28.4% compared to 35.1% for the same period in fiscal 2017. The rate in the fourth quarter represents a blended tax rate for our fiscal year and the reduction versus the prior-year effective tax rate is driven by the decrease in the federal stat rate as a result of the enactment of the Tax Cuts and Job Act issued on December 22 of 2017. Finally, our Board of Directors recently approved a quarterly cash dividend of $0.10 per share, which was paid on September 26, 2018 to common stockholders of record as of the close of business on September 12, 2018. That concludes my review of our quarterly and full year financials, as well as describing our new public reporting segment structure. So, I will now pass the call back to Mike for some final comments. Mike?

Thanks, Bryan. It's not a surprise to any of you that there has been increasing scrutiny on the health of the RV industry, both in the immediate sense, especially around the rebalancing of finished goods inventory in the market, and in the short to midterm in light of increased volatility in the equities market, the price of oil and the Fed-stated position on the upward trend of interest rates. We will speak directly to some of the perceptions in the overall RV market and comment on our own focus here at Winnebago Industries. From a long-term perspective, we remain convinced that the growth and penetration prospects of the recreational vehicle and marine segments in North America remain very positive. Multiple generations that have been customers, from baby boomers to millennials and even younger, view the appeal of an outdoor lifestyle as increasingly and very enticing. Our customers want to be active, healthy and mobile, all with an increasing sense of adventurism. OEMs in both industries continue to work hard to ensure the versatility of the product platforms are both relevant in terms of the features offered and have the capability of being used by end customers in an increasing number of use cases. Campgrounds and marinas remain full, prompting especially further investments to increase campground capacity across the country, which is ongoing. Retail shows remain busy in both industries. We have just experienced one of the longest auto sales booms in our country's history. And much of that related to trucks and sport utility vehicles, which are half of the perfect marriage in many cases for consumer investments in travel trailers, fifth wheels and marine products. We remain bullish on the future of the RV and marine industries. The RV industry itself is in the midst of a transition, from double-digit shipment growth to one that is projected by the RV Industry Association to be roughly flat for the next 12 to 14 months in total. Broad concerns about elevated levels of dealer inventories appear to be lessening with each recent month. We have been very clear in our previous statements that the dealer inventories of our two respective RV segments – motorized and Towables – have remained in our comfort zones of turns, dollars and aging units that we monitor carefully. There are always spots here and there in your business that you identify to improve, but we enter fiscal 2019 in what we believe is good shape to continue outpacing the industry in terms of growth the next 12 months. We must remain focused on keeping it that way. We have just completed three important events in the fall of 2018 – the Hershey Retail Show in Pennsylvania, the Open House Dealer Industry event in Indiana, and the Pomona Retail Show in California. Given we are in the middle of our first quarter in fiscal 2019, we will not comment explicitly on our results at these shows, other than to state that our new products shown to the dealers at the open house event across our multiple brands generally received strong positive feedback from the dealers. While interest in the RV lifestyle remains robust, we do believe that the industry performance comparisons in the back half of 2018 and early 2019 will continue to be pressured, primarily due to how excessively strong the shipment demand was during those same periods a year ago. Regardless, Winnebago's objective is to outperform the market to the greatest degree we can. We are paying particularly close attention to the macroeconomic conditions on a daily basis, especially consumer confidence, the stabilities of the equities market and the wealth effect, the interest rate landscape, fuel prices and political developments around policies such as import tariffs. The cost impact of the tariffs on the RV and marine industries have been real and, in some cases, are ongoing with the new rounds of tariffs imposed against China really just now beginning to impact our financials. The retaliatory marine tariffs from Europe, Canada and Mexico have impacted North American – or specifically US exports of marine products to those regions. And while Winnebago Industries and our brands have worked extremely hard with suppliers and dealers to mitigate these headwinds, they do continue to persist as real pressures on our daily business. We support ambitions by our administration for updated free trade agreements and hope those goals can be achieved as swiftly as possible and with limited reliance on new tariffs as negotiation tactics. Our team at Winnebago Industries is squarely focused on what we can control – strengthening our culture internally and our relationships externally, creating the very best product value and quality propositions we can in the market, managing our income statement and balance sheet in an efficient, increasingly profitable manner, providing our end customers the best aftermarket service they can find, and being smart in how we allocate our capital organically and inorganically in the months and years ahead. We have a more diversified business platform than ever before, with active RV, marine and specialty vehicle operations. From an opportunity standpoint, we have significant share expansion potential in each of those global markets in the next 5 to 10 years, all of them in a state of continual consolidation into the future, but with customers on the search for premium companies with strong brands that deliver on the product and service promises they make. During our November 2017 Investor Day event in New York City, we offered several long-range performance goals for the end of our fiscal year 2020. Our team is still focused on meeting those targets. 10% market share in the North American RV market, 10% of our net revenue coming from RV product categories and/or non-RV businesses that we were not in at the end of fiscal year 2017, and 10% operating income. Each of those three goals has their own unique challenges in being able to attain them, but we will give it our all over the next two years and continue forward. From a closing standpoint, we hope that you can tell this morning that we are pleased with our full fiscal year 2018 and fourth-quarter results and remain committed to materially outperforming our respective competition in fiscal year 2019. I want to thank our team again for all of their hard work here at Winnebago Industries and I want to thank you very much for your time today. We will now turn the line back over to the operator to begin our Q&A session.

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

Good morning. Thanks for taking my question and congratulations. I wanted to ask about kind of the margin trajectory. I know you've laid out that 2020 goal. And you don't provide guidance, but maybe you could just help us understand how margin might unfold in 2019 on the way to 2020, and maybe specifically comment on the two or three things you're doing in the Motorhome segment that would help you achieve that longer-term goal?

Good morning, Craig. This is Mike. Thank you for your questions. I'll handle the latter question around Motorhome, maybe some of the key things we’re focusing on, and then I'll turn it over to Bryan to talk a little bit more, and probably not in great detail, though, about some of the things we’re thinking about in terms of continued margin performance overall for the enterprise. The Motorhome business, for me, is a combination of most likely two very important things. One is operational efficiency and performance and excellence in the manufacturing and supply chain side. In addition to some of the cost input pressures that we continue to face, we continue to have significant opportunity internally to do a better job of managing our own costs and efficiency and productivity as it relates to the manufacturing environment and the supply chain environment. In some ways, we were our own worst enemy earlier in fiscal 2018 with some of the inefficiencies that we saw in the operations area, specifically around the manufacturing transition in the last couple years from Iowa to Oregon for some parts of our diesel manufacturing. That combined with new product development, which in most cases, our expectations are that when the team introduces new products to the market that we take a forward, strong, incremental step in improved quality, improved profitability, and certainly improved retail velocity. Our hope is that that those two drivers – the continued transformation of the product line – the Revel is a great example of that on the Class B side, very strong demand. We won't get into details, but good profitability for that particular business. We need more new products like that to continue to take our margins forward. But also, we need to continue to do a better job at controlling our manufacturing and supply chain costs, specifically the ones that we can control, how efficient our manufacturing lines run, how efficiently and effectively we negotiate with suppliers on securing materials at the right price, those are probably the two big things. I’ll defer now to Bryan here for his comments maybe on the enterprise overall as we look towards 2020.

Yeah. I guess I’d highlight just a few things, and some are going to be overlap with Mike’s comments. On the positive side, I think we’re going to continue to focus on our product line improvements. Particularly in the Motorhome business, I think as those occur, we will see margin lift. To me, the most important thing in any business, any industry is having an innovative product line that’s differentiated. And so, Mike made some of those comments already. I would just emphasize the importance of that product line evolution in the coming years. Secondly, we will be pricing our product always to the market, but with some aggressiveness to offset some of the headwinds that we are seeing most recently. So, price in general will be one of the things that will lift and help us offset the headwinds. Operational efficiencies, Mike alluded to this as well. In the Motorhome business, we have a lot of opportunity there. And we consistently and frequently talk about those opportunities. We feel like we've got the right people leading the business and the operations to identify and then execute on those operational efficiencies. And then, finally, I would just mention business mix. We've got great trends in our Towables business, which I think are well-known by all of you on the call here. And as we continue to grow that business or outpace the growth of the Motorhome business, we’re going to have a favorable mix impact that we should expect to see. The headwinds are a few. I guess I’d just call out. In the near term, there's certainly some pricing pressures out in the marketplace. The competition is stiff. There's some promotional activity going on that we need to, in some cases, follow where we don't have differentiation. In cases where we do have differentiation, we don't have to follow to the same magnitude, but we’re seeing some pressures out there in the marketplace in the form of promotional activities. Tariffs, well published here. First on 232, which covers the steel and then aluminum, that has settled a bit in the more recent spot markets. Initially, there was a lot of opportunistic pricing there, but that seems to have settled a bit. And I think that, for the most part, we were able to offset those initial rounds of tariffs with pricing activity. We've got the tariff 301, some of that – there’s list 1, 2 and 3. There's still some question marks as to what the impact of those tariffs will be. Some of them are still threatened, going into effect at the beginning of calendar 2019. So, we’ll see how those play out. The US-Mexico-Canada deal, for the most part, we don't think will have a terribly material impact on us, but we’re keeping a close eye on that trade agreement, TTIP and some of the others as well. So, there's a lot going on by the administration and the impact from tariffs, trade agreements, and pending negotiations. And so, for the near term, those will remain a headwind that we’ll continue to strive to overcome. As I mentioned in my prepared comments, we go after cost savings initiatives, we work with our vendors to make sure that we’re finding all areas to mitigate those cost increases as possible. So, tariffs in general remain a headwind. And then, we will continue to be working on the transformation of our Motorhome business. And Mike alluded to that already. And that’s not a quick fix. We’ve never characterized it as a quick fix. It’s a longer-term journey to make sure that we’re transforming that Motorhome business and the associated profitability in the right direction. So, sorry for the long-winded answer, Craig, but that’s kind of how we think about both the near-term and the long-term margin.

Thanks. I'll get back in the queue.

Our next question comes from Seth Woolf from Northcoast Research. Your line is open.

Thanks for taking my questions. Congrats on the outperformance this quarter. Really strong results in an industry that’s a lot more challenging. So, I guess, two things. First on the margin front, really appreciate all the expansive qualitative commentary. But as we think about the numbers, it sounds like the first half is going to be a little pressured; and then, the back half, you get some of these efficiencies and the product line evolves. But taking a step back, your gross margins, can they be positive? Are they going to be flat next year? Or is this something that’s going to – these headwinds will drag consolidated margins down? Is the first question.

Good morning, Seth. This is Mike. And again, thanks for your question. I think Bryan gave a good overview there in response to Craig’s question about, as you said, some of the qualitative elements that we’re facing. Obviously, we’re not going to share specific forward projections on what we think our margins will be going forward. I will say this. We continue to have opportunity on our motorized business to perform better. That remains to be seen by the specific team working on that business, but that is a business that, in our opinion, continues to have runway there. But they face some of the same headwinds that Bryan described earlier. Our Towables businesses have performed now for several years at a very strong level on the margin side. And we continue to be determined to keep it that way. That being said, we see the same pressures on Towables that we do on motorized. And you work every day to try to manage those costs. So, if I were to sit here today and say, do we have as much margin runway today as we did a couple years ago from both a mix and sort of a current headwind standpoint, it’s probably more difficult today to manage the margins than it was a year or two ago. But that doesn't mean, as you can see in our Q4 results, that we’re not working very hard at it. So, that's probably the way, Seth, I’ll answer the question, is it's harder today to drive those in today's environment. And we’re doing everything we can to mitigate the cost input pressure and find ways to very carefully have the market absorb some of that through some select price increases at times. But the best thing we can do long-term is to make sure that the health of the product line remains dynamic and strong, so that we can price where we need to in the market versus the competition.

Okay, thank you. And then just, Mike, you made the comment about the current RVIA forecast. You said flattish for the next 14 to 18 months, I believe. So, I guess, just thinking about that dynamic, how are you thinking about retail? I know in the past you’ve said that you think we’re kind of settling into the mid to low single-digit retail environment. Is that still how you're thinking about it? Or has that changed at all with some of the very real tariff impact that you're seeing and have to pass along? And how does that go through your thinking?

That is certainly, obviously, the most important question right there, what is the retail environment going to be. And we did reference in our prepared statements the RVIA forecast through 2019. So, I said I think the next 12 to 14 months. And I think, for the first time in a while, the RV Industry Association has put out a forecast that includes sort of a base forecast, but also an upside and a downside. And if I remember correctly, the site is maybe plus 1%; the downside is minus 4%. And that's on a shipment standpoint, not a retail standpoint. But as I also said, we’re watching very carefully some of the factors that could influence retail. Certainly, pricing increases in the market due to some of the things we’ve talked about related to cost pressure is one. The interest rate environment is something we’re watching very carefully. While historically still very much low versus the last 30 to 40 years, the upward trend in interest rates certainly is material versus where they’ve been in the last seven or eight years. We watch fuel prices. The volatility even today in the equities market is something that probably will lean on people. So, we’re watching all of those factors. I would say when you take it back to the specific market, we do believe that Towables will continue to grow faster at a retail standpoint than motorized. Motorized has seen more pressure on the retail side than the Towables side has here as of late. And, again, our objectives, regardless of where the industry is at is that we can hopefully outgrow the industry in both segments. Now, we’ve not done a great job of doing that on motorized. We’re looking to turn that around. But on the Towables segment, as you know, we’ve been very strong from a retail performance standpoint there the last year plus. And we continue to believe we can exceed. So, I'm hopeful that it will settle into a blended low single-digit retail pace. But as you know, time will tell. And again, given our increasing competitiveness in Towables where that retail should be a little bit stronger, that should bode well for us as we continue to increase our share there.

Thanks, guys. I’ll hop in the queue.

Thanks, Seth.

Our next question come from Scott Stember from CL King. Your line is open.

Good morning. And thanks for taking my questions.

Hey, good morning, Scott.

Maybe if we could just go back to talking about, I guess, profits for next year. And, obviously, you’re not giving guidance. But we talked about the tariffs. I guess the latest rounds of tariffs. Just when you look at an RV and what's coming from where, it’s my understanding that the lion’s share, the vast lion’s share of product is not coming from China. And I guess, maybe you could just frame out the size of that potential impact because, obviously, there is some impact there and it doesn't seem to be that tremendous of a deal. But, I guess, when you add it in with everything else, I guess, just trying to figure out how big on to itself the tariffs – the latest round of tariffs could be.

Yeah. Good morning, Scott. This is Mike. Let me comment first here to your question about just costs in general. I think your question does remind me that we probably want to be careful to not overweigh tariffs as the sole driver of some of the material cost increases that we've seen here in the last year or so. I think generally the healthy economy, certainly combined with some consolidation in the supplier side of the business, along with both the direct tariff cost, but also the related tariff costs. And what I mean by that are domestic sources of commodities and/or components raising their price because the tariffs were enacted. I think the combination of all of that really is factored in. We won’t share specific numbers, but if you were to go back and look at the impact, that is probably related to both direct tariffs, but also maybe related domestic pressures due to those. I would say that our P&L probably absorbed a gross hit of eight figures in fiscal year 2018. And our fiscal year plan for 2019 assumes candidly probably another eight figures of hits cost-wise directly related to what we believe are either tariffs or related pressure because those foreign sources are going up and domestic sources continue to raise their prices as well. We do source a high percentage of our steel and aluminum from domestic sources. And while some of those prices have settled a bit in terms of volatility in the past several months, they still remain elevated versus where they were in past quarters or past years. And so, some of this is sort of annualized, when you catch up and when these things kind of move through the supply chain. But I would just offer that we’re looking at eight figures that have hit our business in the past, will hit our business in the future and really we then have to go to work to take those – mitigate those costs in the best way that we can. And it doesn't always have to be related to that component specifically. It could be efficiency or cost reduction in other areas of the business. I don't know, Bryan, if you would add anything.

No, I think that's good, Mike.

All right. Just back to the commentary, I guess, about pricing. I think, Bryan, you made some comments about pricing about some your competitors being a little bit more promotional. We’ve seen it with one of your top customers. Could you talk about whether that's more happening in the Towables segment versus the motorized segment.

We’re seeing it in both and hearing it from the dealer network on both sides of the business, Scott. I wouldn't emphasize that it’s more one-side of the business from an industry standpoint versus another. I’d say – I made this comment previously. I’d say we feel it more in those parts of our business where we lack differentiation. So, in the case of the Revel and the Travato, where we feel like we have great products or products that are positioned very well, we feel less of that or less of a need to respond to competitive offers. And likewise, our Grand Design lineup, as you all know, is positioned really well also. And so, the same story goes there. Where we’re not as differentiated, then that's where we feel a lot more of the pressure.

Got it. And your belief, obviously, a lot of this is occurring given the – and you guys talk about – you're comfortable with your inventory levels, but, clearly, you have to respond to competitors that have too much inventory. Would it be your expectation that as these competitors bring their inventories into line that that pricing pressure would mitigate somewhat?

Scott, this is Mike. I would phrase it as, that would be our hope, that we would see some of the discounting by competitors return to more normal levels in the future. But, obviously, that's an element that we can't control. They will make those decisions based on a number of factors, given certainly how successful we’ve been on the Towables side of the market, taking some share here in the last couple of years, we need to come to work every day with the anticipation that our primary competitors there are going to continue to be aggressive. So, we will see. And again, we do see the dealer inventories in the industry normalizing and lessening. We certainly can't see explicitly the production levels from our competitors. But you hear qualitatively that the industry has been adjusting its production levels as well. And so, it does feel as if that transition is happening. And really, the question has been, and will be, as to how much time it takes connected to then, obviously, the retail demand from an end customer standpoint. So, the way we continue to phrase things around here is we can't control the overall market, but we certainly can't control what share we can take in the market and, hopefully, how profitable we can be going forward. So, we just have to remain focused on what we can control.

Okay. And just one last quick question. Some of the newer models that you have, notably in the motorized segment, the Vita and the Porto and the Class C, D, like this was a new area for you. And the revised Adventure model and Intent, can you maybe just talk – I know you don't want to get into the specifics of how each recent retail show, but maybe just give us a little bit more granularity on the reception that you’ve seen, given that this is such an important piece of the market for you guys to recover in? Thanks again.

Thanks, Scott. I'll say exactly what we said in the prepared statements, which is, overall, we've been pleased with the receptiveness from the dealer channel as to the new products that we showed at the open house. Not all of those new products have made it to some of the larger retail shows this fall. So, we can't give you sort of an apples-to-apples comparison between end customers and dealers. But specific to the Winnebago-branded motorized side, we continue to get feedback that we are moving in a net positive direction with the health of the product line, specifically on our gas products. We have more work to do on our diesel products. A lot more work to do there, but specifically on our gas products, we are making some progress. And you mentioned several of them in the Class A and Class C categories that we put an especially strong focus on. The other thing that we are particularly proud of related to Winnebago motorized is that we have grown share in the Class B category in spite of increased competition in that category as more of our competitors spend more energy and time getting into that business. And, certainly, we’ll watch carefully the Thor and Hymer marriage because that has an element of a Class B to it as well. But our class B team is not only working tremendously hard, but they're being really very effective in the market. And so, we’re making steady progress and we’d like to see the results move even faster. But, again, we feel as if the businesses is, bit by bit, getting healthier on that side.

Great, thanks.

Our next question comes from Tristan Thomas from BMW (sic) [BMO]. Your line is open.

Hi. Good morning.

Good morning.

Two questions first. I know you're actually not going to talk numbers, but was kind of curious what change in dealer ordering patterns you're seeing and then how do you manage any changes there with all the new capacity you're bringing online? And then, I had a follow-up.

Yes. So, open house, Tristan, is really probably one of the biggest ordering events of the year from a dealer standpoint. And while we won’t share this morning the specific results from the open house, given we’re currently active in Q1, you will get a sense for those in our December earnings call when we show you end of Q1 backlog. But, again, generally, our brands have momentum. And the backlog has a few gymnastics happening on it on the towable side as we mentioned in the script. The unit backlog for towables was down slightly, about 4.4%, but the dollars were up 6%. That’s a combination of both the mix within Towables in terms of the line, but also between our brands, Winnebago and Grand Design. Grand Design continues to grow in material ways, and so they are bringing some of the order ASP up in that way. But we've also brought capacity online in our Towable segment. And so, personally, I'm not a big fan that backlogs are a pure indicator of future shipments because you have a lot of sort of noise in there related to new products and timing. You have sometimes too heavy of a backlog because you’ve been capacity constrained. And so, we actually have been working to bring our backlog down on the Towable side knowing that the market perception might view that not in the most positive way but we’re providing stronger service to our dealers and actually probably capturing retail more effectively by bringing the backlog down a little bit, at least in terms of units. But you saw the motorized backlog remain strong at the end of Q4. And again, we anticipate that that will generally remain that way for a while into the future. And so, we’re not commenting today specifically, but, hopefully, you can tell of my tone that we continue to feel that our backlog remains in the appropriate shape for what we hope to achieve in the business.

Okay, got it. And then, just one more quick question on Chris-Craft, just kind of for our modeling benefit. Can you maybe reiterate what you expect next year in terms of revenue and profitability?

Yeah. We are not, Tristan, sharing specific numbers there. Given, though, that Bryan and his team now have broken out the segments, between probably the information shared there along with probably some of the balance sheet elements, you guys can potentially get to some of those answers in a very general way. I will tell you, though, that it is a business which we intend to grow materially into the future. It's a big brand and a small business, but one that we think we can grow materially. We bought the business because we think we can grow it significantly, while being very careful and respectful to the iconic brand that it is. But it is also a strategic play into a new industry segment, marine. And as we learn about the marine segment, as we obviously continue to work with the new talent we have in the marine segment, it allows us to consider other opportunities both within Chris-Craft, but also potentially inorganically in the future. So, it is our intent that that other segment from a topline standpoint would grow in the future. Now, it's got a bunch of expenses in there related to some of the corporate costs that Bryan mentioned. So, it's not pure in that sense. But we anticipate that you'll see the top line continue to go on a positive direction on the other segment in the future. And a lot of that will be related to Chris-Craft and a little bit of that related to our specialty vehicle business.

Got it. Thank you.

Our next question comes from Michael Swartz from SunTrust. Your line is open.

Hey, good morning, everyone. Mike, just wanted to touch on dealer inventory. It’s been a big question mark or area of concern with investors. Just looking back at the end of the quarter, looks like your consolidated inventory at dealers is about 40% year-over-year. So, I just wanted to get a sense of – how do you get more comfort in that number? And I think you had mentioned that some the metrics that you look at point to your overall feeling pretty good about that. I was just wondering if there's anything you can share on that front.

Yeah. Thank you, Michael. That's, obviously, a popular question in terms of our comfort. A couple of things there. Our inventory comps are actually probably getting in some ways better. They were up 40% for this quarter. I think that's slightly down versus a Q3 number before. But we have maintained that the majority of our dealer inventory increase is related specifically to Towable’s market share gains. As both the Grand Design and Winnebago-branded towable product lines become more popular with the dealers and earn market share at a retail standpoint, the dealers are giving our towables brands more space probably at the expense of a few other brands that they would carry. And so, the other thing that's been happening in both of those brands, and specifically in Grand Design, is that we have been expanding the product lines. And so, every time you come out with a new product – in Grand Design’s example, in 2018, the latest one was Transcend, a travel trailer in the stick and thin category. But before that, imagine, both of those products were new to that brand and the dealers around that brand were committed to taking those products in. And so, it's a combination of retail market share, it’s a combination of new products across the board, and we continue to pay close attention to turns, to dollar inventory levels, but we especially pay close attention to aging. We start looking at products when they're six months or older and we track them for as obviously long as they sit on the dealer lot. But with every month, we pay more attention to it and increase our conversations with the dealers. And both from a dollar standpoint, a turn standpoint and an aging standpoint, our dealer inventory remains within the – I call them comfort zones that we’re pleased to be at concerning the trajectory of the business. And so, if the industry was in trouble because of dealer inventories being too elevated, we’ve maintained that that's been less because of Winnebago Industries and our brands’ performance on that side. Even though they are higher than a year ago, we have a growing business taking share, and that's the primary reason driving it.

Okay, that’s great. And then just second color, maybe the other hot topic. And I think Seth touched on it, is just retail growth and, obviously, hard to predict the future. But maybe you can give us a sense of what retail growth for your particular brands has looked like, maybe year-to-date or at least some of the latest trailing figures you have.

We don't share specific retail trend information, but I’ll share this with you. Our Motorhome business has generally been in the low single digits. The two towables brands have generally been in the double-digit retail growth category. And that's as far as I will go specifically. And again, that varies by type of subcategory and product brand, but those are sort of the overall numbers. It is a seasonal business. It does vary by week sometimes and by month and by quarter, but that's where we've been. Certainly, the industry has been settling to some different numbers, especially on towables. But, again, towables remain stronger than motorized. And I would say that’s similar to the way that it's been occurring in our business as well.

Okay, great. Thanks for the color.

Thank, Michael.

Our next question comes from Greg Badishkanian from Citi. Your line is open.

Hey, guys. It’s actually Fred Wightman on for Greg. So, a few different times, you’ve talked about potential challenges from rising rates over the coming year. Can you maybe just give an update from a high level what you're seeing on the retail financing side? Are you seeing pushback from consumers? Those higher rates are actually convincing them to forgo a possible purchase?

It’s Bryan, Fred. I would characterize it as we’re not yet seeing on the retail side the interest rate increases affecting the demand curve, okay? So, it may be affecting the price point that the buyer is doing the purchase and causing them to shift down, in other words. But we’re not seeing the overall – I'm not hearing the interest rates affecting the overall demand curve. I would say I'm hearing – again, more in line with the dealers side of things, but the financing of the inventory, it certainly causes them as rates go up, what, 75 to 125 basis points, probably in that range, causes them to have further pressure to reduce their inventories, of course. So, we’re mindful of that. But like I said, I'm not hearing a lot of impact yet at the retail level.

Okay, great. And then, I think either in the Q&A or prepared remarks, you talked about an eight-figure impact on margins from tariffs and commodities this past year. You had also talked about another eight-figure impact this year. Is that an incremental eight-figure impact? Or are you just saying that those higher costs are not expected to fall off this year?

Fred, this is Mike. I was the one who made those comments. So, I'll take accountability for them. The eight-figure reference is difficult to say whether they were all related directly to tariffs or not. I would say direct tariffs or related incremental growth cost increases have probably ranged in the eight-figure range, which is $10 million or above, both in fiscal 2018 – and as we put our fiscal 2019 plan together, we assumed that we would continue to see similar pressure again in 2019 at that eight-figure level. Now, that's not the net, but that is the gross. And, obviously, that gets put into the planning along with any other cost pressures that we see. So, I don't want to alarm anybody to that because I think you've heard a lot of manufacturers, especially in the durable goods industries, state very specific numbers at times about the impact of the material cost inflationary environment on their business. So, we are not as impacted as some other industries because a large percentage of our bill of materials are not directly imported from some of the foreign countries that the administration has been negotiating with. But as I said earlier, it does have an impact on sort of global pricing, including domestic sources as well. And so, again, not meant to be alarmist, either going backwards or going forward, it's just meant to state that it's real and it's something that we’re managing every day here. So, obviously, our results to date have been okay in light of those costs. But as I said, it gets tougher and tougher going forward to continue to mitigate those and we’ll continue to come to work every day with that intention.

Great, thank you.

Our next question comes from David Whiston from Morningstar. Your line is open.

Thanks. Good morning. I guess, sorry to ask kind of a cynical question, but you guys have done a really good job with the tariffs so far, on cutting costs, raising prices, working with your partners and whatnot. But, realistically, how much more can you keep squeezing?

Yeah. That's a great question, David. This is Mike. Over time, I think you definitely, in some categories, probably run out of the juice, as you squeeze the lemon there. But you have to find new ways within your business model to drive costs out in general. And believe me, in all of our businesses, we’re paying attention to expenses across the whole of the value chain. And really for two reasons. Obviously, in a cyclical business, we want to maintain a low fixed, highly variable cost structure. And so, as any slowdown would occur in the industry, we want to be nimble enough to, obviously, manage those variable costs down. But also, while we’re a 60-year-old company, we’re a company that has some legacy elements that can be way more efficient. And with new businesses, like Grand Design and young businesses like Winnebago Towables, there's definitely opportunities in each of those areas as well to be efficient in non-material ways. We’re looking at freight. We’re looking at, obviously, our sales and marketing costs, our SG&A leverage over time. So, really, the whole of the income statement is fair game for us to try to find the dollar that might equal or exceed the dollar that is happening on the material side. But you're absolutely right. It gets harder over time. And the market, at some point, can only absorb so much pricing as well until you have a real retail impact certainly happening.

Thanks. That’s helpful. And then, on Chris-Craft, I know it’s early for you guys owning it, but do you think they're well-positioned from a cost efficiency point of view? Do you think a lot of fat there to cut? Any early insights there would be helpful.

Well, I would definitely not use the term a lot of fat. I think it's a business that can continue to be more efficient. But I would say that the great thing about the Chris-Craft brand and its customer base is that it operates in relatively thin air in the premium segment. And right now, we are somewhat capacity constrained. We knew that when we bought the business, but that represents an opportunity for us going forward in terms of allocating capital to release that capacity constraint. So, we see growth opportunity certainly in that business. We see the opportunity to increase their profitability as well. In some ways, it's almost opposite world. But their customers are extremely affluent. And so, even in very difficult times, some of their customers have the ability – and often paying cash to the dealers – to continue buying these beautiful boats. And so, again, that that business is certainly not immune to cyclicality, but I would say, in some ways, because it's premium to super-premium, it's insulated in a way that you wouldn't quite expect at least for a little while. But that business remains strong here at the beginning of our fiscal year and we’re excited about the integration and how that's going. And we’re spending more time with the leader of that business and his team, trying to determine how we can put our foot on the pedal. And again, increase their presence in the market. It is not a high share brand, but it is definitely a highly attractive brand. And it will be a way for us to learn about the marine industry and consider more plays in that space in the future.

That’s helpful. And when you used the phrases of premium, supreme premium, as an auto analyst, I've got to ask, not being all that familiar with boating, is Chris-Craft sort of similar like a Mercedes, Lexus or is that very high-end, even like Rolls-Royce [indiscernible] boating?

Yeah. I would say that they – from a metaphor standpoint, they probably span both of those. They definitely have some things on the very high-end, but they've also worked intentionally here over the last couple years to have some products that are more accessible, but still very much viewed as luxury boats. And so, again, we each would probably have our own brands in that metaphor, but I think the ones you used are fine for now, and we’ll see if we throw any other auto brands into the metaphor mix later.

Okay, thank you.

We do have a follow-up with Seth Woolf from Northcoast Research. Your line is open.

Hey, thanks for squeezing me in here again. Just a quick question. On the retail trends, you talked about Towables continuing to outperform motorhomes. Motorhomes have been soft recently. I think most people on the call are probably in agreement that the inventory destocking is winding down. Do you think that the recent outperformance of Towables has anything to do with dealers kind of moving some of the inventory, like the excess inventory? Because my understanding is that, going back to last year, the segment of the market where inventory was probably the heaviest was in the towable category, not really in motorhomes. So, I was kind of curious your thought there and then how that factors into the thinking going forward. Thank you.

Yeah. Thanks, Seth. This is Mike. I do think the dealers have been very focused on the towable side. But as you know, dealers are all of different types. So, there are some dealers that are more of a towables dealers and there are other dealers that are more of a motorized dealer. And then, there are certainly dealers that are full-line. So, really, kind of depends. In macro, because towables is 87% of the units in the industry, obviously, any macro inventory concerns related for the most part to towables. And dealers have been focused there. I do think the other trend that's happening in motorized that the dealers and the OEMs are working through is the shift from historically Class A gas, Class A diesel, larger motorhomes to smaller motorhomes as the Class B category continues to rise in popularity, but also you're seeing Class C platforms that are more versatile and even an appetite for smaller Class A products as well. And so, we believe that there will always be a market for large 38 to 45-foot Class A products, but that the motorhome business is probably entering a period here where smaller is viewed, in some ways, as more attractive by the motorhome customers too. And so, you'll see our product line strategy reflect that going forward. I think you saw some of that in Elkhart at the open house. And so, that's the other thing, I think, is happening, and so dealers are kind of looking at that category and trying to kind of anticipate the shift in mix that they need on their lots too.

That makes sense. Real quick before I let you go. You talked about the backlog and I was just curious, we've been hearing positive things from the open house show. And in the past, you have disclosed intra-quarter backlogs. And because you're closer to the ordering dates of the show than your publicly traded peer that could influence the backlog. I was just wondering if there's anything you could share with respect to what your backlog might look like right now.

Seth, we won’t share that. And I will take direct responsibility for that, in part because the perceptions that the market has backlogs is too simplistic in some ways. Our backlogs remain good for where we want them to be. And as we talked about earlier, with the towables mix between units down and dollars up, we view that as a very positive thing. And so, yeah, we won’t share, probably going forward, much information on intra-quarter backlogs anymore. But, again, we’re also not sounding an alarm on any trends we’re seeing either.

Thanks.

I'm showing no further questions at this time. I would now like to turn the call back over to Steve Stuber for closing remarks.

Great. Thank you, everyone, for joining our call today. We really appreciate your time and we look forward to speaking with many of you throughout the quarter. Thanks again on behalf of Mike, Bryan and myself. Have a great rest of your day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may disconnect and have a wonderful day.