Winnebago Industries, Inc. (WGO) Q1 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Winnebago Industries Q1 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference to your speaker today, Steve Stuber, Director of Financial Planning and Analysis and Investor Relations. Please go-ahead, sir.

Thank you, operator and good morning everyone. Thank you for joining us today to discuss our first 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 first 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 everyone on today's call. We know this is an incredibly busy time of year and we appreciate your time and your interest in Winnebago Industries. On the investor relations front, we have been quite active ourselves. Many multiple roadshows, our Investor Day meeting in November in New York City, and the annual shareholders meeting earlier this week. We are telling the story of our company's transformation often. And thus, I will work to be efficient in beginning this morning's discussion with an overview of fiscal year 2020, first quarter results, and our perspective on the balance of the fiscal year. I will then turn the call over to Bryan Hughes, who will provide important details on the financials, especially considering the accounting implications of our recent Newmar acquisition. I will then return to offer some closing comments before concluding the call with a Q&A session. In early September, as we kicked off the fiscal 2020 year, we entered the first quarter eager to build upon the tremendous progress made in previous fiscal years, strengthening our overall position in the North American RV market, initiating an intentional effort to diversify our overall portfolio, and setting the stage for achieving our future aspiration of becoming a leader in outdoor lifestyle solutions. As you may recall, in fiscal year 2019, annual revenues were $2 billion for a second year in a row, particularly meaningful given the double-digit negative shipment environment of the RV industry. Net income in fiscal year 2019 grew to a record $112 million, and we extended our recent track record of gaining cumulative share in the RV market. We also announced, in September, another transformational event in our company's journey that being the acquisition of the Newmar Corporation. This bold move gives Winnebago Industries a more complete premium overall Motorhome business with a more significant presence in all motorized subcategories, including increased market share in the North American luxury RV market and a more profitable motorized segment in the future. Our overall premium portfolio is now home to four of the most valued brands in the outdoor lifestyle arena, Winnebago, Grand Design, Newmar, and Chris Craft. We expect to maintain the same level of high performance in fiscal year 2020 recognizing there will be important work associated with the Newmar integration. Based on our first quarter results, we are off to a very good start as consolidated net revenues were up approximately 19% for the period, including the three plus weeks associated with Newmar as part of the business. Consolidated top line growth during the quarter was driven once again by strong performance from our Towable segment, Class B Motorhome performance, and as mentioned, a short period of sales contribution from Newmar. We are particularly encouraged that organic revenues at Winnebago Industries, without Newmar, continue to grow at a healthy pace, up over 12% versus the prior year. As a result of the steps we have taken to strengthen and improve the core RV business, we are also seeing more consistent operating results and cash flow. Operating cash flow in the quarter was $79 million, up 45.9% over last year, which allows us to continue to invest in our businesses appropriately. Now, let's turn to the segments in more detail. In the Towable segment, revenues for the quarter were up 16.6% over the prior year period, primarily driven by the strength of the Grand Design brand. Grand Design’s new product launches and recent interior redesigns of many of their models have supported their continued strong momentum and maintain the increasing appeal of Grand Design’s products across a broad customer base. This impressive brand continues to outpace the industry in terms of both unit shipments and retail growth as the GDRV reputation for quality, innovation, and service are accepted well by value channel partners and the end-user buying community. Adjusted EBITDA margin of 10.5% for the Towable segment was flat compared to the same period last year, largely reflecting pricing actions and a favorable mix of business, offset by higher input costs. Towables backlog for the quarter decreased 22% in units versus the prior year reflecting increased utilization of added capacity and the projected shift in dealer order patterns to smaller frequent orders. We remain confident in the forward-looking strength of our multi-branded RV Towables lineup and the opportunities we have collectively executed to perform – outperform the market, even when navigating challenging industry conditions. The overwhelmingly positive reception and excitement around redesign models and new products at the open house in September and showcased at this falls RV retail shows is validating in terms of our future momentum and potential for fiscal year 2020. Turning to the Motorized segment, re-establishing a premium leadership position in this business remains a key priority for us in fiscal year 2020. We’ve enhanced our lineup of high-quality Winnebago branded motorized RVs by launching innovative products and designs. Additionally, the acquisition of Newmar, completed on November 8, has energized our company by adding a highly respected premium brand that allows us to compete in the high-end luxury Motorhome markets. The integration process, which involves a primary cross-company team of select participants is underway and off to a productive start. Matt Miller, now Vice President of Winnebago Industries and ongoing President of Newmar, is now participating in my leadership team meetings and provided an excellent update to our Board of Directors just this week. We are very focused on ensuring the Newmar team retains significant autonomy in operating the business facing the market, but very much benefits from the support and the synergy we can provide from the whole of Winnebago Industries behind the scenes. This is a very similar approach as to our two previous acquisitions and a strategy we believe will result in a one plus one equals three outcome in the future. When executed well, our employees, dealers, and customers and shareholders should all benefit from this transaction. First quarter revenues for the Motorized segment were strong, up 24.6% over the prior year period, including 19.7 percentage points of growth due to the three weeks of Newmar’s operating results. Organic revenue for the Winnebago branded Motorhome business was up 4.9%, driven by a strong Class B unit sales and previously executed pricing actions, partially offset by a decline in Class A unit sales. We remain focused on managing costs and improving the overall manufacturing efficiency in our Winnebago Motorhome business. Last year, we took steps to position the Motorhome segment for sustained profitability. This includes shifting our Winnebago branded Class A diesel motorized manufacturing from our Junction City, Oregon plant to our manufacturing campus in Forest City, Iowa. The transition consolidates and centralizes product development, supply chain, and assembly operations for that brand’s diesel business to a single location with the strong intent to see increased operating efficiency. Our Motorhome backlog increased 34.2% in units from the prior year, which reflects the addition of Newmar, which provided [31.8 percentage points] of growth year-over-year new product innovation, primarily in our Class B lineup. We look forward to improving the financial profile of our Motorhome segment and building on topline momentum throughout fiscal year 2020, while instilling learnings and best practices from our new colleagues at Newmar. Before turning the call over to Bryan, I would like to touch on our Marine business. Chris Craft delivered another solid quarter of sales growth and the retail demand for Chris Craft products remains vibrant. Additionally, interest by quality marine dealers in representing and growing the Chris Craft brand is as high as anyone can recall as those dealers see a stronger Chris Craft business developing, maintaining its unique place as one of the world's most beautifully designed brands, but also carefully expanding its lineup of the inboard and outboard offerings. Through the first 18 months of ownership by Winnebago Industries, Chris Craft remains on track per our M&A models. Our planning process for capacity expansion in Sarasota remains active with the permitting stage ongoing. We will monitor the health of the marine market and the confidence of our channel partners when making a final timing decision on putting shovels in the ground. Chris Craft is a very important brand in our portfolio as it represents the type of premium manufacturer we look to be, and we continue to learn through the Chris Craft team about the marine market and the opportunities it holds in the future for our company. With that overview, I will now turn the call over to Bryan Hughes to review our fiscal 2020 first quarter financials in more detail. Bryan?

Thanks, Mike, and good morning everyone. First quarter consolidated revenues were $588.5 million for an increase of 19.2%, compared to $493.6 million for the fiscal 2019 period, primarily driven by organic growth from both our Towable and Motorhome segments. As Mike mentioned earlier, excluding Newmar, we saw topline organically grow 12% year-over-year. Since the acquisition of Newmar closed on over November 8, we only had the benefit to our reported results in Q1 of three weeks of Newmar’s business. Gross profit was $78.6 million, an increase of 10.7%, compared to $71 million for the fiscal 2019 period. Gross profit margin decreased 100 basis points in the quarter, due in part to the acquisition of Newmar and the impact of purchase accounting, as well as lower Motorhome segment profitability in the quarter. Operating income was $23.9 million for the first quarter, compared to $32.6 million in the first quarter of fiscal 2019. Operating income included the impact of transaction costs of $10 million, inventory step-up of $1.2 million, and amortization related to Newmar of $1.4 million. Net income was $14.1 million, a decrease of 36.5%, versus the same period last year. Reported earnings per diluted share were $0.44 per share, a decrease of 37.1%, compared to $0.70 in the first quarter of fiscal 2019. This decrease was more than driven by a result of transaction costs, purchase accounting, and non-cash financing costs related to the Newmar acquisition. We have provided an adjusted earnings per share performance measure in our press release, as a comparable metric to clearly illustrate our performance, and we will continue to provide this new disclosure for the foreseeable future. The schedules accompanying the press release, have been enhanced to show a reconciliation between reported earnings per share and adjusted earnings per share. Adjusted earnings per share were $0.73 in the first quarter, an increase of 4.3%, compared to the same quarter of fiscal 2019. For purposes of clarity adjustments to reported earnings per share totaled $0.29 and include transaction costs of $10 million, inventory step-up of $1.2 million, and non-cash interest of $1.0 million. I will come back to this topic in a moment. Consolidated adjusted EBITDA was $42.0 million for the quarter, compared to $38.5 million last year for an increase of 9.3%. Now turning to the individual segments. Before I begin the discussion of the individual segments, I would first note that we have concluded for our public segment reporting that 100% of the acquired Newmar business will be included in the results of our Motorhome segment. That's said, starting with the Towable segment, which are not impacted by the Newmar results, revenues for the first quarter were $341.3 million, up 16.5% over fiscal 2019, driven by an increase of 12.9% in unit sales. Considering that towable wholesale shipments in the broader RV market are down 9% on a trailing three-month basis through October, we continue to be extremely pleased with the performance of our towable segment and its ability to consistently gain share in a challenging market environment. Segment adjusted EBITDA for the first quarter was $35.8 million, up 16.1% over the prior year. Adjusted EBITDA margin of 10.5% was even with the first quarter of fiscal 2019, reflecting pricing actions and a favorable mix of business, offset by higher input costs. Turning now to the Motorhome segment, our results in this segment include three weeks of the acquired Newmar business, our Motorhome revenues were $225.9 million for the quarter, up 24.6% versus last year. Excluding Newmar, revenues grew 4.9% during the first quarter, primarily due to growth and market share gains in our Class B lineup and fiscal 2019 second half pricing actions across all product classes, partially offset by a decline in Class A unit sales. Segment adjusted EBITDA was $9.3 million for the quarter, down 22.1% year-over-year and adjusted EBITDA margin decreased 250 basis points, primarily due to the addition of Newmar and pricing in excess inflation more than offset by an unfavorable mix of business and slightly higher SG&A expenses. Turning to our balance sheet. As of the end of the first quarter, the company had outstanding debt of $463.5 million net of convertible note discount of $84.0 million and debt issuance costs of $12.5 million. Working capital was $297.8 million. As anticipated, and as a result of the Newmar acquisition, our current net debt to adjusted EBITDA ratio is 2.0 times applying an unaudited trailing 12 EBITDA associated with Newmar. Our goal is to focus on returning to our targeted leverage ratio range of 0.9 to 1.5 times near the end of fiscal 2020. Cash flow from operations was $79.0 million for the quarter, up $24.9 million or 45.9% over the same quarter last year, driven by our operating performance and favorable changes in working capital. The combined strength of our balance sheet and cash flow continues to provide tremendous flexibility as we expect to continue to invest in the business. The effective income tax rate for the first quarter was 21.7%, compared to 23.3% for the same period in fiscal 2019. The decrease was primarily due to an increase in estimated research and development tax credits for the fiscal year. On December 18, 2019 our board of directors approved a quarterly cash dividend of $0.11 per share payable on January 29, 2020 to common stockholders of record at the close of business on January 15, 2020. As mentioned earlier, I would like to now provide more insight on the adjustments to reported EPS. We are adjusting for three items; transaction costs, inventory step-up, and noncash interest. In the future quarters, we also intend to adjust for share dilution. So long as the dilution is economically covered by our cost that overlay, which provides dilution coverage up to a share price of $96.20. Finally, we will adjust for any material discrete tax items. Note that share dilution for GAAP purposes will begin to impact our reported earnings per share, as soon as our stock price increases above $63.73 per share. With that as our framework for calculation of adjusted earnings per share, the adjustments to our first quarter fiscal 2020 results are as follows; transaction costs were $10 million or $0.24 earnings per share, inventory step-up was $1.2 million or $0.03 earnings per share, non-cash interest was $1.0 million or $0.02 earnings per share. The adjustments to the second quarter of fiscal 2020 are expected to be as follows: transaction costs no adjustment, as these costs were fully adjusted for in the first quarter; inventory step-up 3.7 million or $0.08 earnings-per-share; non-cash interest 3.2 million or $0.07 earnings per share. We currently expect that adjustments in the third and fourth quarters will be limited to non-cash interest and will be in the range of $0.07 to $0.08 earnings per share per quarter. We do not anticipate or forecast impacts from discrete tax items, which may occur from time-to-time. While not adjusted for, we also incurred incremental intangible amortization expense related to backlog dealer network non-compete and other items in the quarter amounting to $1.4 million or $0.03 earnings per share related to the Newmar acquisition. Second quarter amortization expense is expected to be $6.0 million related to Newmar or $0.14 earnings per share. Third quarter amortization expense is expected to be $3.5 million related to Newmar or $0.08 earnings per share. Fourth quarter amortization expense is expected to be $1.4 million related to Newmar or $0.03 earnings per share. Annual fiscal 2020 impact is therefore expected to be $13.2 million related to Newmar or $0.31 earnings per share. Fiscal 2021 is expected to be $5.6 million or $0.13 earnings per share. 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. Happy holidays everyone. Mike?

Thank you, Bryan. I would like to conclude our comments this morning with some thoughts on the overall market, and then our company's progress in the ESG arena. We are in general agreement that the strength of the overall U.S. economy is squarely on the backs of the American consumer at the present time. American consumers have shown tremendous economic resilience and adaptability in the face of a tumultuous last 18 months that has included a material global trade war and increasingly partisan politics in this country. Employees across most companies, including our own are working hard every day to earn a fair wage and improve the productivity of the organizations they work in. The general strength of the U.S. financial markets and the confidence of private consumers and financial institutions alike in the equities market has also provided a sense of stability in these interesting times. As we turn the corner into calendar 2020 and our second quarter of fiscal 2020, we believe there is a sense of stability in our industries that has arrived. Fear of an imminent recession appears to have subsided according to many economists and even the financial press. The recent trade truce with China is a good step in the right direction. Dealers in the RV and Marine industries have been diligent about returning their inventory levels to a prudent smart base. Manufacturers appear to have broadly right-sized their production operations and capacity utilization to levels that match retail and dealer confidence. In total, we feel that there is a better equilibrium in the market where the winners fairly gain ground in market share and those with work to do have difficulty with traction. Winnebago Industries is hopeful we will be one of those winners in 2020. We stated at our Investor Day in early November that our projection for RV industry retail in our fiscal year 2020 is down mid-single-digits. While the consumer is strong from my earlier comments, they have also shown a bit of fickleness for some of the high-end consumer discretionary categories as the election cycle ramps up towards next November. To be clear though, the RV industry is healthy in retail and 2020 should likely end up being one of the top five in the history of our industry. Winnebago Industries is in a strong position to continue to outperform the industry retail trends by double-digit points throughout our fiscal year. With a slightly cautious retail environment, we do believe however that the industry wholesale arena will be much more stable through the year and as stated in New York City there is a solid thesis that can be made for cumulative 12-month industry shipments by the end of our fiscal year that could be down only low-single-digits to even flat if the retail environment is robust enough. Winnebago Industries shipments should organically rise year-over-year given our market share trends and the top-line contribution from the recently acquired Newmar business will be quite meaningful. This past Monday, Winnebago Industries released our inaugural corporate responsibility report. Our shared purpose to help customers explore the outdoor lifestyle enabling extraordinary experiences as they travel, live, work, and play, and our values bond our various brands and businesses together and steer us as a company in the right direction. How we lead matters. It is about the power of and in terms of driving positive financial and social returns. We recognize our responsibility to the people, communities, and outdoor spaces we love. Through this first report, and most importantly the tremendous work being done by our teams around the company, we extend our commitment to making progress on the environmental, social and governance issues that impact our world and most directly affect the long-term sustainability of our business. This Corporate Responsibility report provides a snapshot of where we are now and how we will go forward. Please spend some time reviewing it. Lastly, we also announced this week the addition and appointment of a new Director to our Board, Sara Armbruster, Vice President of Strategy, Research and Digital Transformation at Steelcase. I am pleased to welcome Sara to our Board of Directors and look forward to her many contributions in the future. Yes, it is incredibly important that we added further gender diversity to the composition of our Board, but it is equally important that we are adding someone with Sara's experiences and skill-set to our team. As a senior leader in her own respected organization, Sara will offer tremendous insight to Winnebago Industries on many subjects, including innovation, strategy, digital intimacy, design and general management. She will be a fantastic addition. We have been working extremely hard at Winnebago Industries in the last four years to strengthen the value our Board brings to the company, but also ensure its overall fiduciary and governance responsibilities are being executed at a high level in the interest of our shareholders. Like the rest of the company, we have made good net positive progress with our Board. With that, I will end our formal comments. Before passing the call over to the moderator for the Q&A session, I would like to again thank the now more than 5,500 plus employees in the Winnebago Industries family for their incredible daily contributions to our results and what we are building in the long-term. It is our employees that are truly at the center of our success. My leadership team's commitment is to work diligently to provide them all a safe environment in which to do their jobs, the vision in which they can become connected to, and the resources needed to work in a smart yet engaging manner, all of this, so that our channel partners and end customers have exemplary experiences with our company and products. I am hopeful that each of my Winnebago Industries teammates and all of you listening on the call have a safe and happy holiday season and find some joy in the rest, spirituality or camaraderie of the weeks ahead. We will now begin with the Q&A portion of the call.

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

Hi, good morning. Happy Holidays. I guess maybe a question on just the promotional environment. I'm curious whether – because the inventory situation has been resolved in large part in the industry whether we're seeing a little less promotional activity?

Good morning, Craig. This is Mike. I appreciate your question. I think we've been consistent here recently in stating that our perception being roughly, you know, 10% or 11% of the RV industry right now, our perception is that the promotional environment has shifted. Previously, it was more of a push promotional environment, you know, many months ago when we faced both a field inventory buildup in the dealer channel, but also candidly some inventory at certain OEMs in the industry, that has shifted from more of a push to a pull, and our perception is that a lot of that pull has been focused on aging inventory, you know, previous model year inventory that continues to be worked down by the dealers with some support from the OEMs. So, that is our perception where the majority of the promotional spending has shifted to, and I think in macro, it appears to be a little lower across the industry. I would tell you that again those brands that have momentum, a vibrant product line, good relationships with dealers, are most likely discounting less. Those brands that have some deficiencies in the areas I just cited are most likely promoting a little bit more in order to maintain lot placement and retail velocity.

Thanks. And I guess as a follow-up, we know that Grand Design does not discount, that's part of their philosophy of the company. You've lived through this cycle and this industry and is that something that – you know is what Grand Design does in terms of no discounts? Is that something that your other brands could work towards? Or if not, what prevents you from, I guess, instituting that policy to avoid some of the ebbs and flows in this industry?

Yes, Craig, you are correct in that the Grand Design business is very limited in any discounting. They do offer an open house program for their dealers, but outside of that, they are very disciplined with their promotional support in the field and they can get away with that because of the incredibly valued products that they're bringing to the market that the dealers can sell at good profit margin from a dealer standpoint. We have been working for three years since the Grand Design business joined the portfolio to create more commonality across our entire portfolio with the elements that seem to be critical to the Grand Design success. So, that includes certainly hopefully over time less discounting and all underpinned by a stronger product catalog valued by end customers, but there are elements of channel strategy; there are elements of talent strategy; there are elements of production strategy that we are working to all across the portfolio to transfer those best practices from Grand Design to elsewhere. We are not all the way there yet in all of those elements. We do have an elevated level of promotional spending relative to Grand Design in some of the other parts of our portfolio. The last comment I'll make on your question is that the addition of Newmar is actually quite similar to the Grand Design experience. They are different businesses, but many elements of the Newmar business model are already very similar to the Grand Design business model, and Newmar has been around now for 51 years, so it's good to see the commonality between those two businesses. And so, you know, that's a nice synergy coming into the portfolio from that perspective.

Great, thank you.

Thanks Craig.

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

Good morning. Happy Holidays also, and thanks for taking my questions.

Hi, good morning Scott.

Maybe talk about the Class B side. I know that in the last few quarters we've had some chassis availability issues, but it looks like, at least, from a sales perspective that things are starting to come back to normal. Can you maybe talk about how far along we are in that process, and also with regards to, you know, incoming chassis, the quality issues? Are we in the later innings of these issues?

Yes, Scott, this is Bryan. The chassis issues that we've been seeing has affected Class B principally, but also Class C, while we've seen some improvements, I'd say the delivery from a quantity standpoint there is lingering challenges on the quality meeting our spectrum standards. And so, we continue to incur some production inefficiencies associated with that re-work and bringing those chassis up into our spec. As it relates to which inning might we be in. You know, we're working, I'd say, very productively with the vendor. I think that we've made progress with them. I think it will continue for the foreseeable future here as we work through the issues with them. And so, we're not – we're not prepared yet to call that we're in the late innings of this journey. Some of these issues are certainly deep rooted or systemic, and like I said, we're working very productively with them, but more work to be done I would say.

Scott, I would only – this is Mike. I would only add the following comments to what Bryan said. This particular vendor serves, you know, many of our competitors within the industry as well. And so, we view it as less of a market share issue. It's more of an efficiency financial issue. And certainly, you always want to protect your customer for any challenges with quality issues around your products. So, relative to the rest of competition, we do not feel at all that this is holding us back from increasing our market share in the Class B segment. If anything, it's probably just holding the overall Class B segment from growing at a faster pace in total than what it has been in the past.

Great thanks. And Mike, I think on the last call you might have alluded to the fact that you might be looking for some relief, I guess, at some point for some of these re-work issues. Have you started to do that yet? And if not, when would that start?

You know Scott, those are – those conversations between Winnebago and our vendors on any particular issue and the – you know the sharing of some of the pain involved, you know, is something we’ll keep confidential. It's an ongoing discussion with this vendor, but, you know, we want to come out of this situation with a win-win solution for all parties. So, I'll keep those conversations confidential between the parties, but to Bryan's point, we're trying to protect our production efficiency, we’re trying to protect the customer from any quality issues, and we remain focused on driving market share in light of this. And so, it is better today than it has been in a long time. We will continue to work, you know, to resolve this as best we can.

Got it, and last question is around the core Winnebago business. You talked about how there will be some, I guess, sharing of best practices, and just – maybe just talk about the core business how it performed in the quarter from a margin perspective, excluding Newmar, and then, going forward in future calls, what are the markers that we could look for and talk about, you know, if some of the initial, you know, progress that will be made from having Winnebago and Newmar working together?

Yes, I’ll start with the organic Winnebago Motorhome performance in Q1, and it all starts with retail. I will tell you we were pleased with overall retail and Winnebago branded Motorhomes in quarter one. We believe it slightly outperformed the industry retail in that segment in those three months. I have visibility as we sit here today, you know, to retail through last week in our business, you know, part of our second quarter, and the only thing I’ll comment there is that, you know, we continue to see Winnebago Motorhome retail stabilizing and be at or even slightly better than the industry retail for the Motorhome segment. Now, the way we're getting there is certainly our own path. The Winnebago team continues to drive tremendous success in velocity through the Class B business. Our share continues to increase there. It becomes a higher part of our product mix. The good part with that is that you're seeing even the – some of the ASPs continue to elevate there with how the mix in that category has been going. We've got some tremendous new product coming in the future, including the Solis, which is not far away here in the fiscal year from being a part of our menu there. I was pleased in Q1 with the moderation in the decline of Class Cs. It was a decent quarter in terms of Class C performance. We've got a couple of product brands that do quite well there. We have the rest of the product lineup, especially in Class C gas to continue to work on. Our Class C diesel business has always been relatively stable. The Class A business is obviously where the accretiveness from the Newmar acquisition will take hold in total. It will allow us to become more selective with the Winnebago brand about where we want to play with Class A gas and Class A diesel underneath our flagship brand. We continue to see deficiency there on that segment versus the rest of the industry. I will tell you though, the entire industry is struggling on the Class A value side of the equation. Newmar is doing very well where they play, and, you know, we are very pleased with the retail on the Newmar side as they've come into the business for the last five or six weeks, and we see them continuing to take share in their particular sweet spot. So, that is the – that is sort of the look from an organic standpoint. Going forward, what are some of the markers? You know certainly stabilization of shipments and retail share in Class C would probably be the first thing that we'd want to, you know, keep an eye on. Continued progress on Class B, you know, for Winnebago to hold, but preferably increase share, and then, I think you'll – what you'll see emerge, Scott, over the next couple of years is a complementary strategy on the Class A side between the Winnebago brand and the Newmar brand in terms of how we cover the market. We need to do a better job of profitability in that sub-segment as well, and that is my first priority with the Winnebago brand is to make sure that the profitability and sustainability of profitability on the Class A products is there, so…

Great, and thanks again.

Thank you, Scott.

Thank you. Our next question comes from Steve O’Hara with Sidoti. Your line is now open. Steve O’Hara: Hi, good morning.

Good morning. Steve O’Hara: Just quickly – thanks for taking the question. Quickly just on the new trade agreement North agreement – North America trade Agreement and the old NAFTA agreement, were there any issues with Canadian sales around that with the ending of NAFTA and then does the new agreement potentially have any positive impacts, going forward?

Steve. Good morning, this is Mike. Thanks for the question. Yes, the new USMCA agreement really doesn't impact our business a significant amount, and in some ways, I wish that were a little bit different, primarily because we don't have quite the share, we'd like to have on the Winnebago branded side in Canada. The good news is on the Grand Design side, the share of Grand Design products in Canada is not too dissimilar from the share of Grand Design products in the U.S. But from an impact standpoint, looking backwards here, in the last year and a half or so, the issues dealing with the ongoing negotiations around USMCA and the challenge of getting that pass through the U.S. Congress has not inordinately affected our business North of the border by any means. We are paying attention to several elements of the USMCA, particularly around any tariffs or requirements on par of our auto parts manufactured in North America and also some of the discussions and agreements included around no – position of tariffs on autos from Canada, or Mexico. So, generally, we're in agreement, but that trade policy needed to be refreshed and that is a positive step in the right direction. However, that does not significantly affect our business in a huge way. We pay much more attention to the ongoing discussions between the U.S. government and the Chinese government in terms of the trade policy discussions there in the tariffs that are in place and now in some ways on hold on that particular subject. Steve O’Hara: Okay, that's helpful. And then I'm sorry if I missed it, but did you talk about Newmar's organic growth in the period that you own them or maybe even for the quarter overall for the period?

No, we don't disclose that. Steve O’Hara: Okay. And so, I assume you're not going to kind of talk about what they did going forward kind of year-over-year. I guess I'm just, I mean, it would be helpful. I guess understand that – are they continuing to outperform or how they're doing versus – they've done – what they've done in the past I guess and maybe how much of that performance of improving Class A is due to maybe your improvements on the legacy side versus Newmar growth or continued outperformance?

Yes, I think what you see Steve, looking at the retail information that comes out from SSI they continue to take market share at a nice pace and their trends are continuing to be positive in that regard. So, we have positive expectations of course for their continued success there. Steve O’Hara: Okay. And then maybe just lastly, relative to Grand Design. I mean in terms of the – are there any things that you're watching in terms of producing too many units or keeping dealer inventories in line? I mean, it looks like dealer inventories. I think we're up again. But I, – and I know you're taking share. But is there a point at which you know and I must say you're there yet, but I mean is there a point at which you say we need to pump the brakes on inventory. I mean, you guys are clearly outperforming. So, I guess that's not an issue right now, but I guess I'm just wondering, obviously everything gets over bought at some point, is there anything on the horizon that concerns you may be on the dealer inventory side there as being too high or pockets that we've been too high?

Yes, thanks for the question. It's a fair one we've constantly alluded to the fact that the increased field inventory levels with Grand Design are almost solely associated with their market share increases and even at times some careful expansion of their dealer base and their product line, obviously here in the last year into as well, we are not overly concerned at this moment. As I believe you're well aware and most people who are on this call, they have a very experienced industry team and there is a really healthy sense of discipline and commonsense, humbleness in that particular team about not getting over their skis in terms of filling the market up. So, you never say never, we need to watch that every day, but at this time we're not overly concerned by any means with the field inventory there. If we should see or hear any concerns from our dealers that team has the ability very quickly to modify their production schedule. I want to be very clear in that particular business. We build very, very few open orders. These are orders that end customers and dealers have generally asked for. This is also very similar to the Newmar model, and so when you run a production strategy, which is, you know minimizes the lack of open inventory that you're pushing into the channel, you tend to be in better shape if the market turns south. I'll make one last comment, maybe an effort to preempt potentially a future question, but some of you may be wondering about the Towables backlog, certainly Grand Design is a big part of the business. We have very little concerns with the Towables backlog. The number that we're reporting this particular quarter. I know on the surface. It appears as a material step backwards. A lot of this is timing in terms of new products, our capacity that came online at certain times throughout fiscal 2019. We are literally weeks away from capacity coming online again at Grand Design through one of our recent projects and the ordering ship patterns have shifted in terms of dealers ordering product more frequently versus bulk orders. So, we have very little concerns about specifically the Grand Design business going forward in terms of the retail velocity, the appetite from dealers for product and their ability to react in a smart way to those trends.

Yes, I'll just add one more thing on to that, if I may, recall the Grand Design relationship, that they have with the dealers has a quid pro quo to that relationship that the dealers will carry the full line and so part of the growth in the Grand Design business, as well as in the field inventory is related to the filling out the brands at Grand Design have, and I think that that certainly contribute to the field inventory growth as well. Ultimately, the way that we manage it, both the Grand Design management team, as well as at an enterprise level is through inventory turns, we manage that or monitor that very closely and we continue to feel very good about the inventory turns, should that ever appear to be heading in the wrong direction, then certainly would – the Grand Design team would step in, intervene and manage field inventory from a turns perspective. Steve O’Hara: Okay. Alright, thank you. Happy holidays.

Yes. You too Steve.

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

Hi, good morning. I had a couple of questions for you. First, Mike, you mentioned that your forecast for the industry for the fiscal year was retail down mid-single digits, last quarter you said down low-to-mid single digits, so is there a change in thinking there?

No, I probably just forgot to add the low during my comments this morning. Gerrick so, listen, your guess might be as good as mine, what we've been seeing with the initial SSI retail reports each month is a gross number that ultimately gets adjusted pretty materially here recently to a net number 30 days later. The net adjustments have essentially been here recently, in that down mid-single digit range. I guess probably the brunt of my message is that, retail patterns will probably very similar going forward. So, call it mid-single digits, I hope it's a low-single-digits, I did not mean to infer any new negativity by the absence of that this morning.

Great, thanks for the clarification. Last quarter, also you put some numbers around the sprinter chassis issue, you mentioned $30 million to $40 million in Class B and Class C business that might have been lost. Are there any new numbers you can put around on that, did you recapture that $30 million to $40 million, how much of an impact this quarter. And then also how this has impacted your EBITDA margin and motorized this quarter.

Yes, great. I wouldn't say that the top line has recovered what was lost, and I don't think that that was never our expectation that, that would be fully recovered, due to just the flow the availability of the number of chassis in our own flow within our plants. And so, I think, I would say that the flow in terms of quantity through our plants has normalized to a large extent. I mentioned earlier that there is still some inefficiencies as it relates to the rework on those chassis, but I don't think that the quantity has been harmed.

Okay. And I just had one more question. Motorized EBITDA margin do you have a target you're shooting for there? What is a good number to shoot for over the next couple of years?

We've stayed a long time that our internal goal that we've communicated for ourselves is to return to a double-digit EBITDA ratio over the long term. And we're certainly not going to give up on that goal. I think from quarter-to-quarter here we had a slightly lower margin in the current quarter, and that is driven by several things. We've talked about most of them already as it relates to some of the production inefficiencies that we've had related to the chassis, some mix within the classes that we think affected the profitability this past quarter. We've got some production inefficiencies as it relates to Class A, Class C volumes that just affects some of our verticals as you, on this call, I think realize or know we are highly vertically integrated and that is more closely tied to the Class A and Class C businesses. And lastly, also we call that, our prior year profitability in Q1 was favorably impacted by the inventory accounting year we discussed in our Q4 results, probably to the tune of $2 million to $3 million. So, that's part of our year-over-year comp story, but the margin in the current quarter also at 4%, we would expect to increase over the long term towards that internal goal that we've set for ourselves.

Thank you, Bryan.

You're welcome.

Thank you. Our next question comes from Michael Swartz with SunTrust Robinson Humphrey. Your line is now open.

Hi, good morning guys. Just speaking on the Motorized profitability and understanding it's not going to be a linear process getting back to double digits, but I guess, just trying to understand from the – during the quarter from the reconsolidation of diesel production in Iowa, I think, Bryan on the last call you said it was about a $1.5 million headwind in that quarter. Anything you can provide on what that impact was this quarter? Was it a net positive? Was it a wash in terms of the – some of the savings coming out of it? And how to think about that playing out through this year?

Yes, it was not a meaningful contributor to favorable or unfavorable impact EBITDA margin in the current quarter. And that's going to be the case for most of 2020, frankly, we expect that the benefits will start to accrue in 2021 and forward in the amount of approximately $4 million, but 2020 here, fiscal 2020 as well as Q1 of 2020 was not a meaningful contributor.

And what – I think you called out in the press release, one of the headwinds or offsets in the Motorized business from a profitability standpoint was higher SG&A, what was that related to?

Yes. In the quarter, we had some incremental investments in marketing and advertising to enhance our capabilities in those areas, some customer service-related investments that we made. Those were the primary things we were referencing there.

Are those not expected to continue or to continue at that level? Was that was being called out?

That's right. That's right.

Okay. And then just more of a housekeeping item on Newmar, I think Bryan you gave us what the backlogs were excluding Newmar, but any sense of what the inventory – the inventory for Motorized at quarter end was without Newmar?

Yes, let me look that up here, I'll get back to you as we go to the next question, but Steve slip into it, and you'll have it shortly and we'll give you that number, okay?

Okay. That's great.

Sure. Yes. So, Mike, real quick. So, Newmar, we had about 1,400 units, 1,420 units of field inventory related to Newmar. So, our reported number was 5,169, of that 1,420 units were Newmar.

Okay, perfect. Thank you for that. And just finally, and I think, Mike, you talked about some of the teams from Newmar and the Motorized – the Winnebago motorized team are starting the integration work now, and at the time you made that acquisition you were looking for $5 million synergies over three years, has that picking changed at all, because if you look at these two businesses together you've got a $1.2 billion cost base and you're calling out $5 million in savings, that just seems at the surface pretty low. Has there been any change in that thinking and any sense of when you might update that?

The integration process is five or six weeks new and the team is well organized and beginning all the work to that end that needs to happen. I will be very honest with you; we need to be able to exceed that number. We want to make sure that the acquisitions that we've put in place in some ways can meet their financial return hurdles on more of a synergy light model, so that we don't lean on probable synergies in order to justify acquisitions. That $5 million number is a conservative reasonable number, and I don't disagree that with the scale of our business now, the challenge for the team is to exceed that. So, timing-wise, we'll give you updates as they become appropriate, but my expectation is that we will take a good hard run at exceeding that number, but I won't offer what a new number might be quite yet. The team has got more work to do.

Alright. Thanks a lot. That's it for me.

Thank you.

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

Hi guys, good morning. It's Fred Wightman on for Greg. Mike, in your prepared remarks, you did talk about some, I think the term you used was fickleness for consumers in some of these high-end discretionary products. Can you just sort of give a bit more detail on the election impact that you're expecting next year, is that something that you've seen historically being retail and what impact if any of that could mean from a cadence perspective?

Yes, to be quite transparent with you, I was just beginning my tenure here at Winnebago Industries in 2016, during the last presidential election. So, I'm not steeped in history at Winnebago Industries, nor in the RV industry in terms of past election cycle impact. It is difficult to define that fickleness, we get asked often if the American consumer is so robust in other parts of the economy, why is retail off a little bit in the RV business? And that's not the easiest question to answer, because the answer is probably multiple in terms of its reasons. I think generally, consumers continue to spend in a number of facets of their life, whether it's the retail side, now holiday shopping, restaurants or travel, but some of those higher end products maybe like ours that are more of a want as opposed to a need, it appears that they've just slightly taken that foot off the gas through some of the retail that's been trending. Is it a little bit of uncertainty in terms of potential future economic policy change related to who sits in the White House, really unclear, obviously to us, but there is just this – earlier in 2019, there was some higher level of difficulty in closing sales within the retail dealer environment that abated a bit as we got into some of the fall RV retail shows. If you remember, Fred, we commented at our last call that we were seeing really good traffic, but also good retail sales at our fall shows. And again, our business continues to see good retail, but – so it's difficult to describe, I think the election cycle has something to do with it, but maybe, consumers are just being a little bit more disciplined with some of those discretionary again, higher end type purchases.

I think that's totally fair. Just switching to Towables, I mean, the segment margin there was flat year-over-year, but it's been sort of choppy in the past few quarters, anything to call out, I know you've called sort of suggested pricing was a tailwind there, but how should we think about that margin cadence going forward?

Yes, I think in the – this is Bryan. In the quarter, there were some mix issues within the products, nothing big to call out. It's mostly just the year-over-year impact resulting year-over-year increases from the lagged impact of some of the tariffs that affected the business. So, a little bit of higher cost there, but going forward, I would expect to continue to see some commensurate leverage if you will, with the growth of the business.

Okay. And then finally, just on the Class B segment, I mean, still strong double-digit growth, but it was a bit of a tick down versus last quarter. A lot of focus on that category across the industry. What do you guys sort of thinking about the trajectory going into next year just from a calendar perspective?

Well, I think the category will continue to grow. I think the addition of new competitors is probably not a bad thing overall for the RV consumer and for the future of that particular segment. Obviously, on our end, as the market share leader currently, we need to be prepared to defend and hopefully advance our share and our teams have been busy with certainly the product development side and the dealer development side to make sure that we have the ability to increase our business. Certainly, the law of numbers might come into place gradually over time as the category gets bigger, and you may see some comp year-over-year numbers that may not be as aggressive both at an industry level and our level as in the past, but we do not anticipate that, that category is coming upon an imminent slowdown or collapse of any real significance. I think, again, a lot of the OEMs are working hard to add that product to their catalog and in many cases, they're being viewed as attractive and part of the nice aspect of the story of Class Bs is it's redefining what a recreational vehicle is within the industry. Many, many people yet probably don't realize that those products are available for them to consider adding to their driveway or their garage and getting out in the outdoors through those. And over time, I think there will be one of the ways that RV and we will become from a lifestyle standpoint, even a bigger part of the mainstream consumers viewpoint.

Great, thank you.

Thank you.

Thank you. Our next question comes from Mark Jordan with Jefferies. Your line is now open.

Good morning. Thanks for taking my questions. Just two quick ones here. So, can you talk about the integration of Newmar, how that's been going? And maybe, have there been any issues or any early lessons that may have been learned?

Yes, thank you for the question. The integration is going well given we are five to six weeks in to the process. We have learned a lot through due diligence, that's certainly more of a risk assessment process. Now, that we have the formal keys to the business and are working closely with Matt Miller and his team, we're getting access and visibility now into even a – certainly a much lower level of detail. There have not been any significant surprises that we would share with the investor community at this time. The team is strong, the product line is pretty sharp, they continue to have a very healthy pipeline of products coming, their dealer relationships are generally fantastic as well and I've been very pleased with the culture that we've been able to start to get an even firmer grip on as well. So, we’re working very hard on the cultural assimilation here in the early stages to make sure that their employees, certainly their dealer partners and their end customers, know that Winnebago will be a great parent company. And then certainly, we have a long list of strategic and financial synergy that we will go after in the future. One thing of note, the gentlemen leading the business in Newmar, Matt Miller, is also spending a nice amount of time with one of his peers on the Winnebago Motorhome side to learn that business so that Matt can potentially offer some opinions and value and more seamlessly, share some best practices across those two motorized businesses. So, very early in the process, we have strong aspirations, but we also need to remain both humble and paranoid that if you don't keep your head down on an integration like that, that something could surprise you, but nothing to report as of late.

Okay, great. And then thinking kind of longer term, following the Newmar acquisition, how should we be thinking about maybe future additions, the company's brand portfolio?

Well, I think you've seen in the last several years a very specific story emerging about a premium outdoor lifestyle viewpoint here at our company. We value brands that are leading brands within their segments or their industries, we value businesses that have a strong leadership teams, we value organizations that have the flywheel spinning, but with Winnebago's support and some synergy that, that flywheel can spin even faster. And certainly, we want businesses that have the ability to be either accretive to the company as a whole, or to the segments that they join within the portfolio. We don't generally share specifically what adjacencies outside of RVs and/or what segments within RVs we could continue to invest in, but you could take some of the filters that you're starting to see from our last three acquisitions of Grand Design, Chris-Craft and Newmar, and generally apply those to the types of opportunities that we are looking for in the future. The last thing I'll just comment on there is that we continue to plant seeds on a very small, but strategically important specialty vehicles business. If you follow us on social media, you'll often see some highlights of our progress there. That's another adjacency that we continue to explore and we'll try to determine what competencies we can leverage with organic and inorganic expansion there in the future. So, stay tuned. With Brian's leadership, we will manage our balance sheet now that's been levered up a little bit, continue to get that back in great shape here over the course of fiscal 2020, and be in a position to be either proactive or opportunistic sometime in the future, again.

Okay, great, thank you very much.

Thank you.

Thank you. 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 I guess heading into the 2020 early retail show season, could you remind us of some of the comps there were so strong last year? Or what will you kind of seeing at retail and what will you guys be comping this year? Thanks.

Yes, I – thank you for the question, I don't have the exact comp numbers in front of me. We had them at the last earnings call, I just didn't bring them to this particular call, this morning. I can tell you that some of the major ones are certainly the Hershey show in Pennsylvania, the California RV show, we also have a big Marine show, the Fort Lauderdale show that occurred, a few other smaller RV shows. Almost consistently across those shows, our brands had positive retail comps at those shows, whether it was Winnebago Motorhomes, Winnebago Towables, Grand Design or Chris-Craft and from what I can now recall from Newmar, they had some decent success at some of those shows as well, either flat to slightly up from what I can recall from listening to them. So, generally, it was a good call. Traffic was decent and at some shows, it was slightly down; at other shows, it was up. But in most cases, our brands performed well at the shows. I can't, obviously, comment on the 90% of the retail industry, RV retail segment that we don't have, but we were pleased that customers were still out exploring the lifestyle, looking for new products and in many cases, looking to upgrade from RVs that they already own today.

Okay.

I'll just add on a little bit, Brandon. Retail is relatively flattish through the early part for last year. It was the wholesale, just to recall, it was the wholesale that saw the big decline. Retail was slightly softer than the prior year, but it was still, due to the healthy trend, just off slightly.

Okay, great. Thank you.

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

Thanks, good morning. On Chris-Crafts in New York, you have that slide that talked about 16%-unit growth and that's – from what I'm hearing from our discretionary team, that's an outstanding outperformance relative to the rest of the industry. So, can you just talk a bit more about what's driving that? Is it purely just that the mark – the brand is just really awesome, and I know gaining share as you showed, but are premium customers' just not hurting whereas the volume customer is hurting in marine?

Yes. Thank you, David, for the question. We agree that the brand is awesome. Here are some of the reasons so why we believe that Chris-Craft retail has been up here recently. First of all, they have been expanding their product lineup, they have a sort of a series of product that GT – they launched GT series where they've been introducing different lengths of boats within that series. And just have done a tremendous job of coming out with some great looking boats that customers are flocking to dealers are seeing, embracing and promoting now in their retail environments. They've also introduced some center console boats here in the last year or so that have also added to that new product energy and vibrancy that is driving those retailers. So, last comment I'll make is that, as I noted in my prepared comments, Chris-Craft has been focused on improving the quality and quantity of its dealer base since our acquisition, and they are having increasing success with getting in front of some of the best marine dealers in the country that can appeal to these extremely affluent customers. And they're having great conversations about the expansion of their brand carefully to complement the other branded or other dealer relationships and that's probably also having an incremental effect as well. One comment on the consumer, you are correct. I talked about the fickleness of the RV consumer, but what's very interesting is that with the Newmar brand of very high-end luxury motorhomes and with the Chris-Craft brand of luxury marine products, we are actually seeing pretty robust retail within those thin air segments. And it gives me the impression that that highly affluent customer is not slowing down at this point in terms of investing. It is probably more of the consumers that are somewhat under that to some degree and so, most of the consumers on the Chris-Craft side actually pay cash further boats from their dealers. And they're less impacted by some of the dynamics with the stock market or maybe even their own business, they've got enough net wealth to make that investment in that toy whether it's a boat or a marine. So, we are seeing a healthy stability and in fact, even a little growth there during these particular times.

That's helpful. Thank you. Switching over to Grand Design, again, another brand that's just got outstanding growth every quarter. Can you just talk a little bit about what customer demographic, both age-wise and socioeconomic, is the Grand Design customer?

Yes, I'll do that at a broad level. The Grand Design brand appeals to a very wide selection of customers. If you were to go to an RV rally or camp ground, the Grand Design customers can be 35 years old and they can be certainly 75 years old, that speaks to a number of things within the business model. First of all, their product lineup is pretty complete right now. They've got everything from a stick-and-tin brand and Transcend lightweight travel trailers in the imagine, but also, they've got tremendous Fifth Wheelers and Toy Haulers across their other brands – other brands of travel trailers. They've really covered the market, and while they started on the premium in the high side, and probably attracted initially the more mature, experienced RVer, their brand progression and their product line progression in building out the product lines has led them into some of the younger, less experienced RVers that are hearing the momentum of the Grand Design brand almost in a code-like fashion within the RV community, the customer service reputation, the quality reputation, the way they take care of customers is bringing really just a wide demographics. So, yes, they're still getting some play out of the baby boomer generation, but the Grand Design customer base as a – I don't know if I can call it balanced, because I'd have to go back and look at the numbers, but they've got strong representation in some of the younger generations of now RVers going forward. So, it's a really good place for that brand to be, because I think that will bode well for them as they grow up. It's only a seven-year old brand and so as they grow up, it creates positive experiences with the younger consumers. They should have a very loyal customer base to continue growing with as those customers' age going forward.

And I appreciate all the detail. All the best in 2020.

Thank you, David.

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

Great, Thank you, operator. And thank you everyone for joining our call today. As both Mike and Brian mentioned earlier, we wish you all a happy holiday season, and certainly, all the best for the New Year.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.