Winnebago Industries, Inc. (WGO) Q3 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Winnebago Third Quarter 2019 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 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 of Financial Planning and Analysis and Investor Relations. Sir, you may begin.

Good morning, everyone, and thank you for joining us today to discuss our third quarter earnings results. I'm joined on the call today by Michael Happe, President and Chief Executive Officer and Bryan Hughes, Vice President and Chief Financial Officer. This call is being broadcast live on our website at investor.wgo.net and a replay of the call will be available on our website later today. The news release with our third quarter results was issued and posted to our website earlier this morning. Before we start, I'd like to remind you that certain statements made during today's conference call regarding Winnebago Industries and its operations may be considered forward-looking statements under securities laws. The company cautions you that forward-looking statements involve a number of risks and are inherently uncertain, and a number of factors, many of which are beyond the Company's control, could cause actual results to differ materially from these statements. These factors are identified in our SEC filings, which I encourage you to read. With that, I would now like to turn the call over to our President and CEO, Michael Happe. Mike?

Thank you, Steve, and good morning to those of you listening in on our call. We sincerely appreciate your interest in Winnebago Industries. I would like to begin this morning with an overview of our fiscal year 2019 third quarter results and some important context as to the drivers behind those outcomes. I will then turn the call over to our Chief Financial Officer, Bryan Hughes, who will provide more detail on the related financial numbers. We will then offer some closing comments before concluding the call with some Q&A from select participants. Our third quarter performance, specifically in terms of profitability and retail share reflects our continued progress towards building a stronger, more diversified, outdoor lifestyle company. Beginning in early 2016, we set out on a journey that progresses still today, a concurrent mission to develop a more robust full line recreational vehicle business using some of the best brands in the North American industry, and to initiate or acquire new revenue streams in other adjacent outdoor market spaces that result in an increasingly more balanced portfolio. As we've mentioned repeatedly, we are committed to becoming a more profitable and efficiently run organization, consistently gaining share in the industries we serve pursuing smart, new growth opportunities that strengthen our brands and lengthens our runway for future success. By staying focused on a truly distinct foundation of quality, innovation, and service in all we do, we have made significant strides towards our goal of transforming Winnebago Industries into a company that you, as investors, can begin to count on for stronger returns. This quarter is a true example of how our new enterprise approach can provide strong consolidated results, even when we incur unexpected external challenges in one of our core businesses. While we are not immune from the North American RV industry headwinds that have persisted during our fiscal year, our consolidated, competitive position and the strength of our diverse set of product lines have enabled us to, once again, outpace the industry. Our continued strength in our Towable segment led by our Grand Design RV product line has once again grown revenues year-over-year and sustained share gains over 100 basis points. More recently, our Motorhome segment has grown real retail market share, driven by impressive Class B momentum and signs of stability within our Class C gas category. On a consolidated level, third quarter revenues were down 5.9% for the quarter, driven by continued destocking efforts by dealers and a significant and unexpected chassis supply disruption related to our Class B van production. I will expand on this development in a moment. Despite a slight decline in revenues, we made further positive progress expanding our margins. Consolidated gross profit margin increased 120 basis points in the quarter, driven by revenue mix and expanding margins in our Towable segment, driven by price increases and the continued success of our cost mitigation efforts to offset rising input costs. Throughout the year, we have been working deliberately to maintain a disciplined approach to production levels staying focused on product quality and working to ensure our retail value propositions in the market are not inordinately stretched. As a result, not only are we expanding margins, but our year-to-date cash flow is up 36% over the prior year. Now, turning to the segments in more detail. Unit shipments in our Towable segment were up 6.5% for the quarter. Despite efforts by dealers to lower inventories on most competitive Towables product lines leading to industry wholesale market declines of 24% calendar year-to-date, the strength of our company's dual-branded Towables products led to the continuation of gaining retail market share and dealer lot space. For the quarter, Towable revenues increased 10.8% from the fiscal 2018 period. Adjusted EBITDA margins increased by 200 basis points, largely reflecting the timing of price increases and effectively managing input cost pressures. Towables backlog for the quarter did decrease 24.2% in dollars over the prior year, reflecting the positive impact of utilizing additional capacity added during calendar year 2018, and dealers shifting more of their order behavior to adjust a shorter order to delivery lead times available from OEMs, including us. Given our retail pace within the Towable segment, we are confident that our net dealer order activity, stocking and retail replenishment, and thus future shipment potential is likely greater than most of our competitors relative to share. Turning now to Motorized. Invigorating this business remains a key priority for us and the launch of new products and designs continues to provide customers with an enhanced lineup of high quality innovative motorized products. However, revenues for this segment were down 34.6% versus the prior year largely due to continued industry headwinds in Class A and Class C products. Unfortunately, and as mentioned earlier, Class B van sales were also down due to a temporary and material disruption in chassis supplied by one of our strategic suppliers, which had a significant impact on us shipping two of our most popular Class B units. We have been working closely with this strategic supplier to enable them to remedy their situation, and we feel confident in the partnership with them and their ability to address this important supply issue. My own estimate of the impact of this supply disruption on our Motorized segment during the quarter was multiple eight figures on the top line and multiple seven figures of adjusted EBITDA on the bottom. We are beginning to see the situation improve a bit as we progress through the first month of our fourth quarter and expect to return to normalized supply of this Class B chassis within the fourth fiscal quarter period. We saw our Motorized segment adjusted EBITDA margins decrease 460 basis points in the quarter versus last year, driven by deleverage related to the sales decline, a mixed impact related to the decline in sales of our most profitable Class B products, and continued competitive discounting in a challenging market. As we address the previously mentioned specific supplier issue combined with a continued focus on managing costs and implementing operational improvements to improve overall manufacturing efficiency, we are confident the Motorized segment will revert to delivering improved levels of profitability in the fourth quarter. We are dedicating a considerable amount of energy and resources to positioning this segment for a sustained retail growth and improved profitability, long-term. In March, we successfully launched several new products at the RVX show in Salt Lake City. Additionally, we are successfully executing against our recent decision to shift our Winnebago-branded Class A diesel motorized manufacturing from our Junction City, Oregon plant to our manufacturing campus in Forest City, Iowa. Motorized backlog decreased 5.6% in dollars, which reflects the ongoing efforts of dealers to right size their inventory levels. Partially offsetting the declines is an increase in several Class B product orders delayed from being delivered as real shipments, again, due to the chassis supply issue mentioned, that affected our Q3. Our luxury boat business, Chris-Craft, celebrated its one year anniversary as part of the Winnebago Industries portfolio in early June, and delivered another strong quarter of organic sales growth during the fiscal third quarter period. We continue to see strong traffic and demand for our products. New products launched during the first half of 2019 will provide additional momentum forward, as we head into our fourth quarter. While consumer demand within the overall boating market has been a bit inconsistent as of late, interest in the Chris-Craft brand remains strong and we are outpacing our own expectations for this business. With that overview, I will now turn the call over to Bryan Hughes, our Chief Financial Officer to review our fiscal 2019 third quarter financials in more detail. Bryan?

Thanks, Mike, and good morning everyone. Third quarter consolidated revenues were $528.9 million, a decrease of 5.9% compared to $562.3 million for the fiscal 2018 period, driven by a decline in Motorized segment revenues, partially offset by the growth in Towable segment revenues and the addition of Chris-Craft. Gross profit was $86.6 million, an increase of 1.3% compared to $85.5 million for the fiscal 2018 period. Gross profit margin increased 120 basis points in the quarter, driven primarily by favorable business mix and pricing in our Towable segment. Third quarter operating income was $49 million, an increase of 1.4% compared to $48.3 million in the third quarter of last year. Our results include restructuring charges related to our previously announced move of our diesel production from Junction City, Oregon to Northern Iowa, in the amount of $1.1 million or $0.03 diluted earnings per share. We expect additional charges related to this production move in fourth quarter in the range of $0.01 to $0.02. Net income was $36.2 million, an increase of 11.2% compared to $32.5 million last year. And earnings per diluted share were $1.14, an increase of 11.8% over the same period last year. Both net income and earnings per share were favorably impacted by an improved tax rate, resulting from the Tax Cuts and Jobs Act, totaling $1.7 million or $0.06 diluted earnings per share, and a change in estimate related to R&D tax credits of $1.4 million, or $0.04 diluted earnings per share. The effective tax rate for the quarter was 19.4%. We currently expect our full year tax rate to approximate 20% and we expect our tax rate in our forthcoming fiscal 2020 to approximate 23% to 24% before consideration of any discrete tax items. We have provided non-GAAP, EBITDA and adjusted EBITDA performance measures in our press release as a comparable measure to help clearly illustrate our performance. The schedules accompanying the press release show a reconciliation between net income and adjusted EBITDA. Consolidated adjusted EBITDA was $55.9 million for the quarter compared to $53.4 million last year for an increase of 4.7%. The biggest reconciling item to arrive at our adjusted EBITDA number in the third quarter was related to charges attributable to the previously announced restructuring of our diesel production. To reiterate, these charges amounted to $1.1 million in the third quarter and are $1.3 million on a year-to-date basis. Now, turning to the individual segments; starting with the Towable segment, revenues for the third quarter were $346.8 million, up 10.8% year-over-year. The increase was driven by increased unit sales and pricing actions in the Grand Design RV business. Segment adjusted EBITDA for the third quarter was $57.2 million, up 26% from the prior year and adjusted EBITDA margins increased 200 basis points, primarily reflecting pricing actions taken over the past 12-months, but also helped by operational efficiencies and good cost management. Turning now to the Motorized segment; Motorized revenues were $160.2 million for the quarter, down 34.6% versus last year. The revenue decline was due to a decrease in Class B and Class A unit sales, driven by industry-wide dealer destocking efforts and a temporary supplier disruption in our Class B chassis, as Mike discussed earlier in his comments. Partially offset by pricing actions taken over the past 12-months. As it relates to the Class C chassis supply disruption issue, we believe the impact in our third quarter was in the range of 10 percentage points to 15 percentage points of revenue growth to our Motorhome segment in the quarter versus the same period last year. We believe we will return normalized levels of production and sales by the end of our current fourth quarter, as we are already seeing an improvement in flow of supply as of today in the fourth week of the quarter. It is our current expectation that we will recapture the foregone sales from third quarter, and any additional impact we see in fourth quarter during our fiscal 2020, since we have the production capacity to do so. Segment adjusted EBITDA was $0.4 million for the third quarter, down 96.7% year-over-year. Adjusted EBITDA margin decreased by 460 basis points, primarily driven by deleverage from the sales reduction, unfavorable business mix within the Motorhome segment, and continued discounting that has been necessary to keep pace in a very competitive landscape. Turning to our balance sheet, as of the end of the third quarter, the Company had outstanding debt of $259.6 million, net of debt issuance cost of $6 million. Working capital was $186.2 million. Our current net debt to adjusted EBITDA ratio is 1.4 times, back within our targeted leverage ratio range of 0.9 times to 1.5 times. Cash flow from operations was $82.8 million for the year-to-date period, up $21.8 million or approximately 36% in the same period last year. The effective income tax rate for the third quarter was 19.4% compared to 26.4% for the same period in fiscal 2018. The drivers of the decrease in the effective tax rate were the year-over-year impact of the reduction in the federal corporate income tax rate associated with the Tax Cuts and Jobs Act or TCJA; and a change in estimates related to R&D tax credits. The impact from the TCJA was $0.06 to diluted earnings per share. The impact of the change in estimate related to R&D tax credits totaled $1.4 million or $0.04 to diluted earnings per share. Considering our year-to-date tax provision, including all favorable discrete items and change in estimates, as well as our current ongoing tax rate assumptions for the remainder of the year, we expect our full-year fiscal 2019 tax rate to be approximately 20% before consideration of any discrete tax items in the fourth quarter. Under the current tax code, we expect our ongoing tax rate in fiscal 2020 and beyond to be in the range of 23% to 24%, again, before consideration of any discrete tax items. Finally, our Board of Directors approved the quarterly cash dividend of $0.11 per share, payable on July 3rd, 2019 to common stockholders of record at the close of business on June 19th, 2019. That concludes my review of our quarterly financials. And with that, I will now turn the call back to Mike to provide some closing comments. Mike?

Thanks, Bryan. As you've heard us mentioned this morning, our third quarter results demonstrate that we have continued to build on the momentum we established in the first half of fiscal year 2019. While the broader RV industry wholesale shipments have declined due to dealers reducing their levels of inventory and macroeconomic noise weighs on consumers, especially as it pertains to consumer discretionary products. We've further demonstrated that our Company's brands can not only endure these challenges, but that we can succeed in growing share and profits at this time. Across our organization, our employees are dedicated to producing high quality, innovative and profitable products, and we will continue to execute on our initiatives to improve the efficiency and consistency, in which we deliver these products to our value channel partners. The benefits of our internal portfolio transformation efforts are evident, as they have made our Company more resilient and able to navigate the headwinds affecting the RV industry, while strengthening our competitive position. This resiliency is due in large part to the nature of our expanded business platform, which is more diversified than ever, with active full line RV, select Marine, and Specialty Vehicle operations. We remain confident that there will be significant opportunities for share expansion in each of those global markets over the next five to 10 years. We will look to grow both organically and inorganically in each of those industry arenas. In fact, I am pleased to announce that we have enough confidence in our future business prospects to announce two important capacity expansion efforts today. First, we will be adding to our manufacturing footprint within our Grand Design RV campus in Middlebury, Indiana, with a new assembly building which is expected to be completed in the middle of our fiscal year 2020. In addition to the two recent expansions in calendar 2018 at Grand Design RV, this new 175,000 square foot facility is validation of the fast growth this brand is experiencing. As mentioned previously, our Chris-Craft business continues to perform well also. I am pleased to announce that we have initiated proceedings to add a new multi-million dollar manufacturing complex, which will add 80,000 square feet of additional capacity on the Sarasota campus. This is an exciting time for the Chris-Craft team in Florida, as we look to build on the success of their brand in the marketplace and launching several new products into the market in the years to come. Next, I'd like to share with you my thoughts on some of the market challenges facing both the RV wholesale industry and the retail environment for the remainder of 2019. While consumer sentiment in the broader RV market is yet to recover from the bearish trajectory we have witnessed over the last year, we remain confident in the long-term retail prospects for the RV industry. Stock market volatility and political uncertainty are certainly weighing on consumers, combined with the potential impact of price increases and rate increases related to some of the new tariffs and/or policies. And while we will not use weather as an overt singular excuse, it is no secret that the spring conditions of 2019 to kick-off our selling season, especially in the northern half of the country, were some of the most challenging in recent memory. However, potential easing of interest rate hikes and the prospects of growth in wages and levels of employment are tailwinds that we believe will keep consumer sentiment levels stable. That said, it appears RV industry retail sales for calendar year 2019 will be down versus last year in the mid-single-digit range and this will elongate the recovery period for the industry. While we are still seeing consumer confidence at stable levels, our RV and voting customers continue to exercise increased discipline as they invest their valuable discretionary resources on large ticket items. More and more consumers in 2019 are focused on value and products that also leverage the latest technology to ensure a seamless outdoor experience with their family and friends. There are signs that the destocking we are seeing, will continue to improve during the back half of calendar year 2019. Next, the RV industry association is forecasting calendar industry wholesale shipments to be down 14% versus last year, with a range or book-ins of down 11% to down 18%. We are generally aligned to their point of view. The industry is also dealing with the looming threat of increased tariffs. While the threat of additional tariffs related to products imported from Mexico has passed, a trade war with China appears to be more lasting. List III of 301 tariffs and pending list for tariffs will combined to have a material dollar impact on our cost inputs. While the impact to our fiscal 2019 results is minimized by timing, the impact of fiscal 2020 could be in the range of double-digits of millions of dollars or more than that of the previous tariffs combined. Similar to how we successfully addressed tariff impacts during the back half of fiscal '18 and fiscal '19, our teams are working diligently now to prepare for our potential plans for fiscal 2020. For the remainder of fiscal 2019 and into fiscal year 2020, we are poised to continue to outpace the RV industry, as it relates to top line sales percentage growth, profitability and share gains. Although, we have made great progress thus far against our strategic priorities, we understand that there is more work to be done. Our management team and employees are working relentlessly to make Winnebago Industries a high quality company that investors can place their trust in. We also continue to be extremely active in terms of adding more talent to the team, improving channel relationships and networks across our businesses, and vigorously scanning our industries for possible new acquisition candidates to complement our existing Group of brands. The strategic and financial benefits of having an expanded, more diversified product portfolio are beginning to translate to more consistent results, and driving incremental growth. We are committed to delivering on our promises and maximizing value for our shareholders and customers in the years to come. With that, I'll begin to wrap up my comments for today. As always, I would like to end by thanking all our Winnebago Industries' employees for their hard work and flexibility during the quarter, as we navigate ever changing RV and Marine industries, and for helping to transform our company. I had the privilege of spending the last two business days, Monday and Tuesday of this week at four of our campuses within the Motorhome business in North Iowa. Unfortunately, none of you on this call can see what I saw these last two days. And that's why I've never been more bullish on what we're building here long term. I am optimistic about our future because our teams are sincerely thinking about customer's problems or unmet needs and truly working on differentiated next-generation solutions in the form of new products, many of which are already in the pipeline for the next several years. I am optimistic, because our employee safety initiatives are taking hold and our workplaces are quickly becoming some of the safest in our industries, improving morale and driving productivity. I am optimistic because of our absolute commitment to product quality and taking care of customers after the sale, if we do get it wrong. Both are true tiebreakers for us. I am optimistic because of the literally thousands of quick wins or continuous improvement ideas, which are being generated by our teammates at all levels of the organization, and are being executed for the benefit of our business. I am optimistic because of the increased commitment here in our company to give back to the communities in which our employees live, work and plan, and the many photos of employees, families and friends I've seen participating in those events. These and many other business improvement efforts are what will continue to make Winnebago Industries and our brands stronger. Thanks very much for your time today. I will now turn the line back to the operator for the Q&A session.

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

Good morning, and thanks for taking my questions. A lot of good detail on the call. Wanted to dig into the retail commentary since that's an issue everyone's focused on. I know weather has been a factor, there's no doubt about that, but what can you tell us about May and June so far in, especially these northern markets that might shed more light on that dynamic?

Yeah, good morning, Craig. This is Mike. Certainly, I think summer has begun in several parts of -- the northern parts of the country. There has been quite a bit of rain and moisture in certain places, but I think we generally feel better about the summer selling season here in the last several weeks. The variability of retail is probably the best way I would describe it, the variability of the retail has settled down, and it has been performing on a more consistent basis going forward. As you know, we represent only today about 9% to 10% of the total industry. So, like many of you in the industry, we don't get to see some of the formal data as well for a while. But the spring was particularly tough. We don't use that as an excuse. We didn't even attempt to quantify it on this morning's call. But if you talk to dealers and even, again, homeowners or end customers, they -- all of them will generally say that in most parts of the country, it wasn't the greatest of springs and summer got off to a little bit later start. So, as you know, we're a very seasonally retail driven business. It's important that we see good retail here over the next several months, so that the dealers as they go into the open house event in the RV industry in September are in a good position to consider a good reorder position at that particular event.

Thanks. And then, in your prepared remarks, you talked about the backlog and also order trends. The backlog did deteriorate, but you seem comfortable with the pace of orders. How do you sort of reconcile all of that and is the answer basically you're taking share?

Yeah. You know, at the end of the day, retail performance is, for us, the ultimate market metric, and we feel confident that as long as -- in certain parts of our business very specifically, as examples, Grand Design RV and our Winnebago-branded Class B Motorized segment, as long as consumers continue to choose our brands in those categories more than other brands that the orders will follow. I think you've heard this from other manufacturers Craig, but during the runup in this past decade of RV wholesale shipments, you saw many dealers putting orders in over an extended period of time. They were ordering products three months out, six months out, potentially even farther. Certainly, with the capacity that's been freed up in the industry due to the market slowdown, as I mentioned in my comments, the dealers are much more comfortable giving the OEMs their orders in a much shorter time period. And whether we call those stocking orders or retail replenishment orders, it's sometimes difficult now to differentiate because they're coming in with, you know again, relatively short lead notice in terms of when the dealers now not want them. But, again, where we have retail momentum, we are seeing a very acceptable dealer order activity where we are -- our product lines are struggling in the marketplace. The order activity isn't as robust, and so both of those should probably not be surprising. But -- so yeah, again, the backlog is certainly year-over-year in a different place but Bryan and I are not losing a lot of sleep about the backward position at this time. We're staying very focused on retail and the turns at the dealers, managing aging inventory so that those orders hopefully can just steadily continue going forward.

Thanks, and lastly, just on this capacity expansion, Bryan, can you comment on the CapEx associated with the new capacity, Mike mentioned. And then more broadly just frame where we should see CapEx trending. I know you don't provide guidance, but we've got to think through the margin implications of all of this as well when we think about fiscal 2020, so any comment around your capacity and the implications for margin next year would be helpful?

Yeah. In the current year, we're projecting our CapEx to be in that $35 million to $40 million range. For next year, we haven't provided guidance yet in that regard as you stated. But as Mike alluded to, as it relates to the timing, we do have the facility for Grand Design that will be coming online mid-2020. And so, the bulk of the spending related to that facility will occur in fiscal 2020. Likewise, with the Chris-Craft expansion, the 80,000 square foot facility that Mike alluded to will be 2020 spending. But neither of those projects will be -- what will drive outlied capital spending in 2020 versus 2019. We did have some capacity expansion that hit our CapEx in 2019, as well of course. So, I don't expect either of those facilities to drive a noted increase in CapEx next year.

Great. Hey, thank you.

Thank you. And our next question comes from Scott Stember with CL King. Your line is now open.

Good morning guys, and thanks for taking my questions as well.

Good morning, Scott.

Let's just talk about Towables again. Obviously, the announcement to add capacity at Grand Design is great news. But maybe just explain how fast you're filling up the rather sizable increase that you had last year, and maybe also tell us are we expecting any expansion in product offerings, or is this just because the demand is just so strong for the current offerings that you have right now?

Yeah Scott, this is Mike. I'll answer that and if Bryan wants to jump in, he can certainly do so. I would just tell you that the expansion at Grand Design specifically is a carefully considered effort to stay up with the projected growth of that business. And while, at certain times during the current fiscal year, we have appropriately throttled back the production rates on several of the lines in the existing Grand Design facilities including the two plant expansions that came online, I believe in calendar 2018. Our projections with that business and almost exclusively related to the growth of their existing Towables business really calls for us to have to consider more expansion there. Now, we recognize that highlighting a capacity expansion project in the midst of the current RV conditions when some of our competitors are certainly talking about managing their capacity back may seem at odds with what's happening, but it is reflective of the momentum that, that particular brand has. But also our belief that that talented team can do what they say they will do and that is continue to deliver great products for our dealers and end customers, resulting in more lot share and more retail growth. And so, believe me, those types of decisions during these times don't come without a lot of deliberation and angst. And we always reserve the right to, I guess manage the pace of construction and other factors should the market take a hard turn in a negative direction. But, we are beginning significant construction work there. And the same thing applies to our Chris-Craft business in terms of their prospects going forward. I would tell you both of those businesses, Scott, have a healthy list of new products and ways to grow on the market from a product expansion standpoint that are not public yet and those are certainly underpinning some of the projected volume that you'll see running through those facilities. But, I guess that's how I view it at this time.

That's great.

We do have some new products coming out as well of Grand Design as they continue to fill out their line. As an example, the Transcend has an extension coming out, likewise the Momentum toy hauler, they continue to expand that line as well as the Solitude and the expansion of the S-Class. So, there's continued expansion of the line as you would expect and in line with comments we've made on Grand Design in the past in terms of how we will continue to grow that business and that's part of the driver of the expansion as well.

Got it, that was very helpful. And going over to Class B, I know you spoke about the transitory issues with the chassis, but maybe just give us an update on Roadtrek with the dislocation of the brand. I know it definitely caused some consternation at the dealer level, at retail, maybe even at wholesale, but maybe just give us an update on -- at least near-term, what the impact has been to you and just highlight some of the opportunities going forward once that dislocation clears out in the next couple of months?

Yeah, that continues to be an opportunity for us, I'll probably turn our comments less so at that particular competitor, who ran into some challenges within the last six to nine months and more so at the opportunity. But it certainly has challenged many of the dealers, that have carried the Roadtrek or HYMER brands in North America, and sent them, obviously looking for alternate solutions. Now in most cases, we have existing dealers already in those markets. And for our existing dealers, it's an opportunity for us to continue to put good Winnebago-branded product in front of them to potentially take advantage of this opportunity and steal that market share from the Roadtrek and HYMER brands. I think we've done that. If you've looked at the retail market share results that have come out recently here from SSI, and as we all know, those are not always complete the moment that they're released, and there's a little ebb and flow of those as they settle. But I believe in the last retail report on Class Bs, we took somewhere in the neighborhood of five more points in market share in that category in that time period. So we are taking share there. We are really just trying to play our game and ramp it up even further as opposed to in any way shape or form -- or in no way shape or form saying anything negative about Roadtrek or HYMER. It's more about what Winnebago has available. And as Roadtrek has a new parent coming into this market that tries to stabilize that business, we anticipate that competition from them and other RV manufacturers will elevate and we have to be very, very committed. That's why this supply chain disruption in our third quarter was especially disappointing, because you can make the argument that our retail share gains could have been even higher in our third quarter, and/or in the coming months, have we been able to deliver some of the product that we had hoped to deliver. So the timing of that is particularly unfortunate for us. And I think the market, we have hundreds of back orders, literally retail back orders, in some cases, of products that our end customers want that we have not been able to fulfill. But as both Bryan and I said, that situation appears to be getting better with every week, albeit it's far from being perfect, and so we'll continue to work through that, we do view that as a very temporary situation and not systemic. And we'll get through that, and we'll continue to hopefully compete very vigorously in that space.

All right. Just one last quick one, if you could just, maybe give a little bit more granular detail on your expectations for tariffs. You talked about List III and List IV, potentially being some pretty onerous impacts, but is that commentary really more of the -- of List IV concerns, because with my understanding that the List III even had a 25% rate wouldn't be that bad. So I'm just trying to get a sense of what gives you this more cautious tone about tariffs?

Yeah, Scott, this is Bryan, I'll take that one. It's both List III and List IV. I wouldn't characterize it as more heavily weighted to List IV. And Mike alluded to our estimate for those new tariffs that will take effect here soon to be at least as big as what the prior tariffs had been; 232 in the List I and List II of 301. And so, our teams are working hard to mitigate it. Just as they did on the previous tariffs, we will be pursuing cost mitigation with the suppliers, reengineering some of those cost opportunities, and then ultimately negotiating with the vendors and pricing where necessary. So, we certainly aren't meaning to indicate that there's not an offset to the tariffs, there always will be and we will strive to fully offset them whenever we can. But there is a risk, certainly, from the new tariffs and it's sizable.

Got it. That's all I have, thank you.

Yeah. Thanks Scott.

Thank you. And our next question comes from Tristan Thomas with BMO Capital Markets. Your line is now open.

Thanks. Good morning.

Good morning.

Can you just -- maybe, I misheard this, the 10% to 15% from the chassis impact, that was a total Motorhome revenue not Class B revenue?

That was total Motorhome segment, yes.

Okay, got it. And then, just kind of moving forward on that, we're seeing a lot of new entrants in Class B. There is really strong consumer demand. What are you changing to make sure you don't have chassis shortages in the future?

Well, I mean we are working very closely with our -- all of our chassis suppliers not just on Class B, but for the entire Motorized business and I would argue we've never been closer with this particular supplier which has had some challenges in the last several months and certainly we've been one of the pioneers in this category. We understand though that there will be several new and increased competitive activity from others in the market. But, we believe that our engineers and our product development resources combined with our sourcing relationships with these key suppliers will continue to put us in good position to not only develop the value proposition that we think will be competitive but you know that we'll be able to get our fair share of chassis from many of these manufacturers and there have been investments and capacity expansion from some of the chassis manufacturers in this space and so that should be positive for, probably not just the RV industry, but probably other industries that might use these platforms. So, it's a fair question and it's one that we do think about and we feel confident that, if we -- we do our job having a strategic relationship on a regular basis with these companies that will stay ahead of the business, give them good forecasts and in turn they'll be good suppliers and ensure that they meet our forecasts. But -- time will tell, but to-date, we've been able to just stay ahead of it. Again, with the exception of this disruption in the last couple of months.

Thanks, got it. Piggybacking on Scott's question, I know you mentioned tariffs. One of the possible offsets is raising prices. I was just wondering how much more can you increase pricing without having an impact on retail.

Yes, that's a great question as well, and I'll tell you that it -- not just for Winnebago Industries but for probably all other durable goods manufacturers and other industries that are impacted by potential rising costs and materials due to tariffs, that is the million dollar question. We have always taken a stance here at Winnebago at least in the last three years to try to price to the market as opposed to price to cost. Now, that's easy to say but you're certainly cognizant of your costs, as you devise your pricing strategies. I am concerned that both as a company with our brands, that we have reached some of the outer limits of pricing elasticity in terms of asking for a premium over some of our competitive brands and so our potential to price is probably more limited today than it was two years ago, because of that. I also think the broader concern and I do think it's had an impact on retail results to-date in the industry and especially in calendar '19 is that, it just generally raises the price of RVs overall to the end customer. And every $10, every $100, every $1,000 that a product goes up in price in the market, it does have an impact. And while there are -- there have been a lot of comments generally about inflation not being an issue in the broader US economy yet. I personally am not sure that that's the case in the RV industry. I do think some of the product pricing and inflation has had an impact on slowing retail here in the last year and I think all of the RV manufacturers are going to be very intentional with how they price going forward in light of this. So, yes, so it is a bigger challenge for us going forward than it ever has been.

Okay. I'm going to sneak one more in here. You talked a lot about kind of the inventory dealer destocking where that is. So I was just curious where you guys think you stand?

We have maintained all along that we've been in a better position than most of our competitors. And I would tell you, we probably haven't done this chart here recently from an IR standpoint and we can probably do it. But our inventory position, on a consolidated company basis, has continued to fall quarter-over-quarter, in terms of comparisons versus a year-ago. And I would tell you, in the Winnebago-branded businesses, especially our inventory is behind the year-ago, it's lower than a year-ago. In the Grand Design business, it still remains higher than a year ago, but that's, particularly saw in Grand Design because of the incredible retail success that brand continues to have. So probably, the biggest thing that we paid attention to today is the aging inventory. And we have a number of programs in place in some places, particularly on the Winnebago side to make sure that the aging inventory that we do see in the dealer channels, are addressed. I'm pleased to report on the Grand Design side that aging inventory, while a little elevated from a year-ago is probably significantly lower than most of the rest of the industry. So, we're watching both and -- but it's a position that we still feel comfortable with, at this time.

Got it, thanks.

Thank you. And our next question comes from Michael Swartz with SunTrust. Your line is now open.

Hey guys, good morning. This is Lucas on for Mike. How are you?

Good morning.

I just had a quick one on import and raw material costs. With some of the major commodities pulling back on pricing recently, do you guys expect to see any benefit of that in the upcoming quarters and are you able to quantify it?

Yes. I think the easing in the commodities will help you one of those mitigating impacts to tariffs, broadly speaking, in our cost inputs. That has been the case, on a year-to-date basis -- calendar year-to-date basis here in '19 as commodities have eased. It has certainly helped our overall equation and offset some of those tariffs that have been in place, and I expect that will continue. I guess that's the way, I'm looking at it right now, I look at it on a blended and overall basis. So you've got some commodities easing and then you've got pressure in other areas.

Got it, all right, thank you, that's all I had.

Thanks Lucas.

Thank you. And our next question comes from Steve O'Hara with Sidoti & Company. Your line is now open.

Hi, can you hear me?

We can Steve. Good morning.

Hi, good morning. I was just curious, on the capacity expansion that you talked about; can you maybe frame that in terms of, maybe the increase in square feet or the increase in production capacity? Roughly, I know it's kind of a separate figure to get around. But...?

I think Steve, what we'll probably do is, I'll ask Steve Stuber here to probably touch base with you and many others on the call that want to gain that information. It's -- we can give you a percentage in terms of increase in overall square footage. But I'm not sure that that's the right way to think about that quite yet. There will be a ramp up in production rates depending on product could vary. But I would say, as a percentage increase, the Chris-Craft capacity increase is a much bigger percentage of their business than the Grand Design is of that particular brand's business. And so obviously, one is much bigger than the other, undoubtedly. But it's a major move for the Chris-Craft business. It's a material move for the Grand Design business. So they're both important. But yes, we'll -- I'll ask Steve to try to figure out how we can maybe give you some more context on that in terms of our overall capacity.

And then, maybe just a follow-up on the tariff related question. I mean, how hard is it -- is the industry may be working on alternate sourcing for some of these commodities that you guys are concerned with on the tariff side. Where are we in that process and what's the potential benefit down the road at some point? Thank you.

Yeah, that is also a very popular question, as obviously you realized as well. Our company is also looking at other choices for those particular products that come from countries that tariff has been implemented on. In some cases, we do have choices and we are -- as we speak, exploring some of those options. But there are other categories of products where the options are either limited in terms of just true legitimate alternatives or the time and investment it would take to relocate that part and find -- and put the new supplier into the business is potentially not reasonable in terms of making that move. You and our other investors can be assured that our teams are looking at those alternatives but there are, unfortunately, some components, where it's much harder to do that than others. As an overall manufacturer, we don't own plants in China. We do not own plants in Mexico, so we don't have the ability in many cases to kind of up and move those ourselves. These are usually important and good conversations with our suppliers about our alternatives and in fact, some of our suppliers are thinking about that same question themselves, as they're having to have these conversations with their customers as well.

Okay. All right, thank you very much.

Thank you. And our next question comes from Bret Jordan with Jefferies. Your line is now open.

Hey, good morning guys.

Hey, good morning, Bret. Welcome to the team.

Thanks. On the last quarter you talked about conversion trends at retail and I guess, do you have any sequential commentary? It sounds like maybe people didn't show up because it was raining, but do you have any sort of feedback on the probability of buying when they did show up at the retail level?

No, I do not have any hard data on that. We generally have a hard time tracking sort of traffic to retail conversion from a very quantitative standpoint. I would just say, in general, that the retail environment this year for higher ticket, consumer discretionary goods, both on the recreational vehicle side but also the boarding side has been just a little bit more difficult to close. In many of my conversations with dealers, the principles -- their sales managers often struggle to even articulate exactly why that is, except that the cuts -- the consumer just doesn't take that credit card out at the end and close the sale. And so, we've hypothesized that it could be any number of factors, general anxiety, increased prices, raising rates on the financing vehicles, the equity markets being -- continuing to be volatile, although they've done better as of late. So no, unfortunately, we don't have any great data to give you on that other than anecdotally; it's probably not a whole lot dissimilar here on June than it was in April.

Okay, great. And I guess that was sort of -- my follow-up question was, now with another quarter of Recreational Marine under your belt, what's your take on that? I guess is the cyclicality of Marine less than RV, because of the higher socioeconomic buyer? Or I guess, how do you compare the two from a cyclicality standpoint?

Yeah, I mean, I think we continue to take the mindset that the RV industry and the boating industry are very similar in terms of cyclicality and that the real answer to that question, you know you probably have to drill down to what category you're looking at, in the Marine industry there are particular segments which have been hanging in there and better as of late. Surf and wake has been one. Pontoons has been a little bit inconsistent, but they've generally ran stronger in the last year. What we found with the Chris-Craft brand, and remember, we're generally the Aston Martin of the 20 to 40 foot fiberglass outboard and inboard category that our customers are still present. Most of our customers in that business pay with cash and that the dealer improvements that we're making in terms of working with our current dealers and upgrading our dealers in certain markets is resulting in a still robust business there. And we were also pleased that some of the tariffs from some of the other countries, particularly Canada have been rescinded, so that those products can be -- again, to flow back into those countries as well. So, yes very similar in cyclicality but Chris-Craft is probably like Grand Design in our RV business, in that they have enough current momentum and are doing enough of the right things that they're able to swim against some of the recent challenges in both of those sectors.

Okay, great, thank you.

Thank you. And our next question comes from Brandon Rolle with Northcoast Research. Your line is now open.

Good morning. Most of my questions have been asked, but on the RV side, I was going to ask, could you talk about the promotional activity in the market right now and how you see that playing out as hopefully retail improves throughout the year? Thanks.

Yeah, the promotional activity in the RV market continues to be very present, albeit I think we have noticed a little bit of a change here as we enter the summer months. I think the promotional activity is becoming more targeted at retail, specifically around some of the aging products. We have seen, I think a slight deceleration on some of the pushing of product into the market as some of our larger competitors, I believe, have done a better job of seeing their inventories normalize both in their lots, but also on their dealer's lots. And so, I think the promotional activity you're seeing now is starting to trend towards products that are stuck in either an OEM or on a dealer lot and you're seeing a lot more product specific spiffs for dealer, sales people against aging inventory or a particular OEM may have overbuilt a little bit on a particular brand or floor plan or model, and you're seeing a push to get that specific product out. I think the industry is generally going to ride out the summer months on the recreational vehicle side. Hopefully, retail continues to slightly improve through the summer months. At retail, the levels of inventory in the field continue to work their way down. And I think we're really gearing up for a quite interesting and potentially strong open house in September as dealers wait for that next industry event to potentially bring a lot of stocking orders back to the market or back to the OEMs.

Okay great, thank you.

Thank you. And our next question comes from David Whiston with Morningstar. Your line is open.

Good morning. Thanks for getting me in. Just two questions, first is on working capital, looking at the cash flow statement, and just doing the math, isolate third quarter year-over-year, it looks like there was a pretty bad headwind particularly around receivables. And is that primarily the Class B issue or something else?

Yes, thanks David. This is Bryan. The receivables issue was notably related to our rental business, in particular at the end of the month which shift towards the end of the quarter. Our rental business is focused in typically the April, May timeline -- or time frame, in terms of when it is -- a spike in receivables right at the end of May, at the end of our quarter related to that business in particular. And so it's hard to characterize or point your finger at one specific thing, but that was an item that jumped out, as we analyzed it.

Okay, thanks. And this other one is probably for Mike, just on your consumer segments Millennial, Baby Boomer etcetera. Can you just talk very briefly about what does the Millennial RV customer want that's maybe different from your other customer groups?

Yes, David. I think the thing that comes to mind are two things, right off the bat, thinking out loud to that question. One is their comfort with technology, and their desire to be in touch with their family and friends from the road, and so certainly that is not only affecting the products that we design, but it's also affecting the camp grounds in which they stay. And the National Park system, which has holes in sort of Wi-Fi or broadband infrastructure as well. So that's one thing. I would say the other thing that we spend a lot of time thinking about is, I hate to stereotype, but generally the younger consumers are less comfortable with doing work themselves in order to make sure the product works to their liking. And so, just the way cabinets open today are different and the way we think about serviceability and what the dealer will touch and what the customer will touch. I would say that they're not yet viewed as disposable products but there's been a lot of articles written, I know and there are companies like Outdoorsy which are much closer to this than we are about to try it before you buy it, trend in RVs and probably in a lot of other categories including automobiles. And so, this phenomenon of making sure that they're getting a -- almost a maintenance free experience and that they can -- that they can experience the product potentially before they buy it, are things that we're tracking. People have talked about Millennials in terms of deferred home ownership for some time, that may in fact be a trend on RV ownership as well that we have to watch, particularly at some of the larger Motorhome segment. So, those are things that come to mind technology, maintenance, try before you buy. Those are probably three things David that I can think about that we're thinking about in terms of that segment of customer.

Okay, helpful. Thank you.

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

Great. Thank you everyone for joining our call today. We look forward to speaking with many of you throughout the quarter. 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 wonderful day.