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Winnebago Industries, Inc. (NYSE:WGO)

F4Q08 Earnings Call

October 16, 2008 10:00 am ET

Executives

Robert J. Olson – Chairman, Chief Executive. Officer and President

Sarah N. Nielsen – Chief Financial Officer and VP

Raymond M. Beebe – VP, General Counsel and Secretary

William J. O'Leary – VP of Product Development

Sheila Davis – Manager of Investor Relations and PR

Analysts

[Scott Stember] - Sidoti

Kathryn Thompson - Avondale Partners

Ed Aaron - RBC Capital Markets

[Mark] - Robert W. Baird

Bob Simonson –William Blair

Barry Vogel - Vogel and Associates

Operator

Welcome to the fourth quarter 2008 Winnebago Industries earnings conference call. (Operator Instructions) Now I would like to turn the presentation over to your host for today’s conference Sheila Davis, Public Relations and Investor Relations Manager.

Sheila Davis

To review the company’s results for the fourth quarter of fiscal 2008 end August 30 2008. Conducting the call today are Bob Olson, Winnebago Industries Chairman do the Board, Chief Executive Officer and President and Sarah Nielsen Vice President and Chief Financial Officer.

I trust each of you have received a copy of the news release with our earnings results this morning. This call is being broadcast live on our website at WinnebagoInd.com. A replay of the call will be available on our website at approximately 12 pm central time today.

If you have any questions about accessing any of this information, please call our investor relations department at 6-4-1-5-8-5-6-8-0-3 followed the conference call. Before we start let me offer the following cautionary note. This presentation contains forward-looking statements within the meaning of the private securities ligation reform act of 1995.

Investors are cautioned that forward-looking statements are inherently uncertain. A number of factors could cause actual results to differ materially from these statements. These factors are contained in the company’s filings with the Securities and Exchange Commission over the last 12 months, copies of which are available from the SEC or from the company upon request.

I will now turn the call over to Bob Olson, Bob?

Robert J. Olson

Thank you Sheila, good morning and welcome to Winnebago Industries forth quarter conference call. While our 50th anniversary was cause for celebration during fiscal year 2008 it was one of the most challenging years we have ever had.

Unfortunately the fourth quarter was even more difficult than the first nine months of fiscal 2008. Although we are pleased that fuel prices have trended lower in recent weeks, the availability of credit and rising interest rates have become major concerns for our retail customers and our dealers.

Consumer confidence was reported at historically low levels during our fourth quarter indicating consumer’s reluctance for discretionary purchases such as our products. As a result of all these negative economic factors the motor home market has declined significantly with both wholesale and retail sales declining over 50% during our fiscal fourth quarter.

On a whole sale shipment basis our RVIA’s economist Dr. [Richard Curtain] from the University of Michigan has revised the industries calendar 2008 shipment forecast downward once again to 32,500 Class A, B, and C motor homes. A 41.3% decrease from actual shipments of 55,400 motor homes in calendar 2007.

I am concerned that if dealers continue to lower their inventories as significantly as they have in the past few months, actual shipments may be even lower than Dr. [Curtain’s] latest forecast. Dealers continue to reduce their inventories in an effort to minimize their flooring costs and maximize return rate of their investment.

They are not replacing the units they retail on a one-for-one basis in an effort to lower their inventories, which means fewer orders for the manufacturer. Our dealer’s inventory of Winnebago, Itasca, and Era brand products at the end of the fourth quarter was 3,663 units.

A decrease of 18.1% from the fourth quarter last year and 15.6% less than dealer inventory at the end of the third quarter of fiscal 2008. We looked for this reduction in inventory to continue until both dealers and retail customers regain confidence in the economy.

At our last conference call in June, I mentioned my concern of an increased promotional environment if we did not have better retail activity and improved dealer confidence. Unfortunately that appears to have happened and we are seeing an increase in discounting both from a whole sale and retail perspective.

I am not sure if there is manufacturing business today that does not have multiple programs in place to help stimulate business. Some bargain buyers are taking advantage, but until retail improves and dealers gain more confidence, manufacturers profits will suffer and some may not survive, potentially resulting in more products will be available in the market place at below cost.

As a result of these negative market conditions, we experienced disappointing operating results for the fourth quarter. As we announced on June 2nd, we idled our Charles City manufacturing facility on August 1st 2008 bringing the production of Class C products back to our Four City Campus.

During the fourth quarter we reduced our workforce company-wide by approximately 600 employees which included the CCMF closure. As well as other reductions throughout the company. Since the end of the fourth quarter we have reduced our workforce by another 300 employees.

We currently have approximately 1,930 employees, a 42% decrease since August 25th 2007. It is extremely difficult to loose valuable employees but also imperative to reduce our overhead costs to more closely align ourselves to the current market. In addition, we continue to employee lean manufacturing philosophies in our processes, as well reduce budgeting expenses in light of the significant changes in our production volumes.

Efforts we have taken so far throughout fiscal 2008, over $7 million excluding one-time charges associated with the idling of CCMF and our head count reductions. Additional annual fixed cost savings expected to be realized in fiscal 2009 are approximately $12 million and we will continue to investigate other cost savings throughout the months ahead.

With the uncertainty of the economy and the need to withstand the pressures of managing our weight through the current down term, our board of directors felt it necessary to suspend our current stock dividend payment to preserve capital as we go into our seasonally slow period of the year.

Dividend payments will again be reviewed at upcoming board meetings. Even though decisions like this are extremely difficult it is these decisions and many others that we have had to make the last few months that will allow us to manage through these very challenging times.

Despite current market conditions we have not lost sight of the fact that we have to continue to develop products that meet the expectations of our customers. We have an excellent 2009 motor home line up with a great selection of fuel-efficient products including the Winnebago View, Itasca Navion, the Navion IQ Class C motor homes and the Class B Era along with our conventional motor homes in Class C and Class A gas and diesel categories.

In addition we continue to work on innovative new products for the future with a very exciting line up to be unveiled throughout this coming year. While the current market is challenging, we are very optimistic about the long-term outlook of the RV industry.

Not only has the RV lifestyle an American tradition that RV enthusiasts won’t abandon. Current customers who have delayed upgrading their motor homes due to economic pressures will soon be ready to trade and start enjoying their weekends and retirement again.

Once that starts, dealers regain confidence and start replenishing their inventories resulting in factory orders that will once again keep manufacturers busy. When wholesale and retail activity pickup, those manufacturers and dealers will survive this down term, will be in a great position to meet the next upswing in this cyclical industry of ours.

With that I will now turn the call over to Sarah for the financial review. Sarah.

Sarah N. Nielsen

Thank you, Bob. I will now review the financial performance for the company’s fourth quarter of fiscal year 2008. Revenues for the fourth quarter were $85.3 million a 64.1% decrease from the fourth quarter of fiscal year 2007.

As an RV industry we saw significant deterioration in wholesale shipments during the summer months. A decrease of over 58% in June through August with the month of August alone down over 65%. Correspondingly, we saw a significant decrease in our motor home deliveries during the quarter of 1,660 units or 64.1%.

Also, our average motor home selling price decreased 5.7% in the quarter. This was due to an increase of product incentives we offered at both the retail and the wholesale level. In addition our sales mix for the quarter was more heavily weighted to lower priced products, as 59% of our volume in the quarter was the Class C and our new Class B products as compared to a 50% mix of class C products in the same quarter last year.

The decline in wholesale shipments for the industry is a direct result of a very challenging retail market that has deteriorated all throughout our fiscal year but most significantly in the past quarter. To illustrate how the retail market continued to deteriorate throughout our fiscal year, you must look at the quarter retail registration.

They were down 12% in our first quarter, 21% in our second quarter, then 32% in the third and 51% in our fourth quarter. Due to these negative retail trends, we have seen dealers focus their efforts on reducing their inventory levels and thus are not reordering product on a one per one basis when a unit is sold to the unconsumer.

All these factors have created a very competitive environment in regards to pricing. We have had in place during the past few quarters a number of retail programs to help the dealers move inventory and in certain instances we have increased incentives at the wholesale level to compete more effectively.

Due to the significant volume decline, resulting reduction and plant utilization and low fix cost absorption and increased promotional incentives we had a growth margin loss of 6.1% in the fourth quarter as compared to gross profit margin of 13.7% in the prior year.

Selling expenses decreased $1.8 million or 33.5% in the quarter due to reduced advertising expenses and reduced wages and bonuses. Generally administrative expenses were $1.5 million or 23.6% as compared to the same quarter last year.

This was a result of a decrease in bonus expense of $1.7 million, reduced product liability expenses and reduced wages. However, these reductions were partially offset by severance expense recorded during the quarter of approximately 750,000 related to all the position eliminations that occurred at both Four City and Charles City during the quarter.

We did close our Charles City manufacturing facility in August as we had previously announced in June, due to the challenging market conditions that required capacity reduction to more closely match market demands. Other results of the idling of the facility, we recorded a non cash charge of $4.7 million to reflect the impairment of the asset value.

Financial income decreased $774,000 or nearly 50% in the quarter as compared to last year due to $60 million less invested during the quarter at lower rates of return. A tax benefit of $5.4 million was recognized during the quarter in the quarterly pre-tax loss.

A net loss for the quarter was $12.7 million as opposed to net income of $14.8 million of last year. I will now highlight a few significant balance sheet items. In regards to inventory, we entered the fiscal year at $110.6 million, slightly lower than our third quarter balance $111 million.

Work in process inventory decreased over 20% in the quarter primarily due to the closure of the Charles City facility but our finished good inventory increased by 20% as market conditions deteriorated so severely in the quarter and dealers continued reducing the inventories on their lots.

As a result, we saw our dealer inventories decreased by nearly 700 units in the quarter. With this reduction in dealer inventories, our production volumes were also reduced to better align them with dealer demands.

Consequently we did not make the anticipated progress on working on raw material and capped even for the lower levels, as that increased by over 4% in the quarter. In regards to our liquidity outlook there have been further developments during and after the quarter that improved our financial flexibility for the coming months.

Although we did not see any reductions of our auction rate securities during the fourth quarter we did successfully sell our last municipal bond in September for par value of 3.1 million and thus classify this as short term at the end of the fiscal year.

During August one of our brokers announced a legal settlement in principle to purchase auction rate securities at Par from investors that held them as of February 13, 2008. The terms indicate that we can elect to be repaid in June of 2010, in addition terms of the agreement provide for immediate liquidity on a portion of our portfolio via no cost loans. So to further enhance our financial flexibility in this challenging motor home market we entered into a $25 million line of credit in September.

No borrowings have yet been made on this facility. I will now turn the call over to the operator for the question and answer portion of the call.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of [Scott Stember] - Sidoti. Please proceed.

[Scott Stember] -- Sidoti

Sarah, would you happen to have the [ASC’s] by product line for this year and last year?

Sarah N. Nielsen.

Yes, I do, for the entire quarter, our average selling price of $81,377 and if you break that out, Class C had an ASP of $65,146 versus last year of $63,139. If you look at the Class B products, we were at $69,359 and from an A standpoint total A’s were $103,362. Gas was $84,362 and Diesel was $159,057.

Comparatively last year we had a Class A price for the quarter $88,086 and diesel was $172,590 and total Class A last year for the quarter was $109, 131.

[Scott Stember] -- Sidoti

And can you maybe just touch on the cost cutting and the streamlining that you have been going through the last quarter or so. I mean obviously nobody knows where the markets going to head for the next couple of quarters, but assuming we’re entering a new paradigm where sales levels will be much lower going forward, do you think that the moves that you made so far are sufficient enough going forward?

Robert J. Olson

[Scott], this is Bob. We continue to monitor this thing everyday and I don't have a great answer for you, but I can tell you what we've done from past experience. Starting in the fiscal 2008 time period that we look at what the market indicators are, and I think Sarah probably outlined it best and when you look at the fourth quarter, how significantly that has paled off each month. And we've gone through and we reduced a lot of our cost expense and we think we're there and then all of sudden it gets worse so we have to go do it again.

It's all really going to hinge upon where does this thing really finally level out, and a lot of that's going to hinge as we pointed out in our prepared statement, that dealer inventories, I think that's going to play a huge impact on where this thing finally does level off at. Because with the dealer inventories, where they are at today compared to where they were, even since the first of the year, there's been tremendous reduction of those inventories.

And what we can't answer yet is at what level are the dealers going to feel comfortable with the inventory levels that they finally achieve. Once we get there, I'll probably be able to answer your question a little bit better, but I think this is going to be a moving target and I think as the dealers finally get to where they feel comfortable with the inventory level, we'll feel comfortable that we made enough reductions in our overhead expenses.

[Scott Stember] - Sidoti

Fair enough. Would you be able to comment where we stand right now as of today, where the capacity utilization is?

Robert J. Olson

For the fourth quarter, we were at right at around 25% capacity utilization.

Sarah N. Nielsen

And that is considering Charles city, we really looked at that all the way into the quarter, because August was a transitional month and on a perspective basis, approximately 30% of our capacity had been pulled out and that will be a new calculation for us in 20009, but 2008 fourth quarter we really had that available to us for the most part all quarter long.

[Scott Stember] - Sidoti

And the cost-cutting that you had talked about, there was $7 million initially, and you've had about $12 million. Did I hear correct that in total, we're looking at about $19 million?

Robert J. Olson

Yes.

[Scott Stember] - Sidoti

And what would the $12 million entail? Can you maybe just flush it out a little bit?

Sarah N. Nielsen

A significant portion of the $12 million is related to head count reduction. We have contracted our work force at every area in salary ranks and hourly ranks. And so, approximately $8 million of that relates to just from a smaller footprint in relation to people, and the remaining pieces of that are a reaction of other expense reductions. Part of that is not having the physical [inaudible] facility like Charles City, but the lion's share of that was primarily people.

[Scott Stember] - Sidoti

And these have are moves that have taken place already?

Sarah N. Nielsen

Yes.

[Scott Stember] - Sidoti

And just real quick, just on the auction rate security, Sarah, what's the time you're getting that money back, again?

Sarah N. Nielsen

Well, a portion of our portfolio, we have the ability to obtain full par in June of 2010. The remaining portion of that portfolio, we don't have a settlement in place that has a defined time frame. So, that is an element where the broker is more so working with an underlying student loan trust to help them refinance and redeem the securities and pay full par value, but it's been a pretty volatile credit market in relation to that effort.

So, outside of the amount that we were able to redeem here in September, we're still looking at all this to be long-term at this point.

[Scott Stember] - Sidoti

And just the last question just on the dealership front, have you experienced any of your dealers suffering significant financial pressures to the point where you might be on the hook for any repossessions?

Sarah N. Nielsen

From a dealership standpoint, I would say the marketplace is more challenging. However, we haven't seen a significant change in the amount of dealer locations that we have at the end of '08 versus last year. That's something that I think there's an increased risk for all manufacturers on a perspective basis. Our repurchase obligation at the end of the fiscal year is about $200 million.

It's come down from the third quarter, just because it's reflective of one year beyond the invoice date and that through time, does move down and obviously when we have a quarter with anemic deliveries like we did, we're not adding as much into the dealer inventory pool. But I think that is a relevant risk on a perspective basis, but we haven't seen significant dealer failures.

Robert J. Olson

[Scott], I might want to add to that we've prided ourselves over the years that we've got one of the strongest dealer bodies in the industry, but that's not to say that in times like we are in right now, that there aren't going to be some challenging times for these dealers. And I agree with Sarah, that the exposure is probably greater than it was a year ago, but you can't lose sight of the fact that we do have one of the strongest dealer body's in the industry today.

[Scott Stember] - Sidoti

That's all I have.

Operator

Your next questions comes from Kathryn Thompson - Avondale Partners.

Kathryn Thompson - Avondale Partners

What is the break-even level from a revenue standpoint with Charles City closing?

Sarah N. Nielsen

Well, we knew that that would be a relevant question after those [inaudible] and I prefer to answer that from a unit standpoint. We look at, on a quarterly basis, we need to be producing and delivering in that 1,400 or 1,600 unit range to cover our fixed cost structure intake to be profitable at a very small level.

So, obviously you look at what we did in the fourth quarter and we're not at that level, and we've had a lot of pressure in relation to future orders on a backlog in light of the environment that we're in. So, that's a significant headwind for us on a perspective basis.

Kathryn Thompson - Avondale Partners

So, you said that's on quarterly basis, total units?

Sarah N. Nielsen

Yes.

Kathryn Thompson - Avondale Partners

And does that take into account your makeshift towards lower priced products and [inaudible] fiscal years?

Sarah N. Nielsen

Yes, that's why we're looking at a range. It's going to move around a little bit in relation to the number of units were talking about, but so many other factors that are outside of our control in relation to what happens in the marketplace, but that's a fair way to look at it based on the information we have today.

Kathryn Thompson - Avondale Partners

And then surrounding the dealer closures, and even today we saw a – we got word of a dealer closure in Virginia, about 300 units, and with any dealer closure, you just have units that go on the market whether it be a Winnebago product or another competitor's product.

How do you manage around dealer closures from an inventory standpoint, from a reserve standpoint, and what happens to the units, are they extruded to other dealerships? How does the market absorb these units?

Robert J. Olson

I'll answer part of that and I'll let Sarah answer the other part from a reserve standpoint. But we look at this as not a good thing for the industry in total, because you are going to have the flea market mentality. And when a dealer does go out, and depending on who is responsible for the repurchase of those vehicles, whether it be a bank or the manufacturer, which you could have both, they have to go back into the channel somewhere.

And usually what will happen is whether it be through auction or really some very good deals to existing dealers, they will be absorbed into the normal retail channel. And when that happens, it just displaces an order that we may have gotten or any other manufacturer may have gotten for a new product.

And as – we've already seen it, I mean, it's been going on since November of last year when some of the manufacturers had gone out of business. They had lot inventory. The dealers were able to gobble some of those up at some very attractive prices, and when all of those are in the channel and trying to be retailed, the dealers aren't replacing with normal factory orders from those manufacturers that are still in business.

Kathryn Thompson - Avondale Partners

And would you say, before we hope over to Sarah on the reserve question, I mean, I hate to put it in the seasonal standpoint, but the dealer going out of business season really picked up in August, and I kind of see it tapering off in December. Is that a good a way to think about it?

Robert J. Olson

Well, I think they looked at – they've got the same seasonality as what we've got, I mean, obviously. And I think part of that is going to depend on where they're located at. You've got some dealers that their season already picks up more towards the tail end of the calendar year. And I use examples of those that are in the Southwest, the Southeast, where you've got snowbirds coming down, where you've got a dealer that's in the North, that's probably their slow time of the year.

But when you've got snowbirds migrating down to the warmer climate, there is an appetite that they might want to trade out while their down there. So, it's a hard question to answer Kathryn from the standpoint of is there a specific time for every dealer. And industry-wide, it's probably more seasonal and the timeframe that you talked about there is relatively close, but you do have the exceptions with the people that are in the warmer climates.

Kathryn Thompson - Avondale Partners

So, do you have any clarity on the reserves that...

Sarah N. Nielsen

Well, we have historically established a reserve, based on where our experience has been and at the end of the fiscal year, we gave full consideration to their market environments. And we looked back at time frame, in the early '90's where there was lot more of this going on, increased our reserves to where we felt it was adequate to mitigate against that.

But it's hard to predict what will happen and at this point, we have a larger reserve established on a perspective basis, because of what conditions we're facing, but it's still not a very material number. And on the locations that we have today through our dealer channel are very close to where we were a year ago.

So, I think we do have on a competitive advantage with the network that we have established. That maybe we're going to see the benefits of that in the next year, during – especially the winter months, but that's something that we'll have to see how that actually plays out. But I think it's fair to say that there's more risk there.

Kathryn Thompson - Avondale Partners

So there's more risk to increasing your reserve because of your concern about the dealer inventories?

Sarah N. Nielsen

Yes, I think there's a higher risk on – more dealers seem to exit the business or to default and it's kind of case-by-case. You have to evaluate what that will do and how that will impact us specifically, but at the end of fiscal year we had a higher level of reserves to account for that risk.

Robert J. Olson

And I think one thing, Kathryn, is that you look at all of the opinions that have been written out there, whether it be through dealer surveys or talking to manufacturers, and I think everybody agrees that this has probably been one of the most difficult downturns this industry has every seen.

And one of the reasons for that is there's so many variables. What was the number one issue three months ago, now might be the second or third and I use gas and fuel prices as an example. Three or four moths ago, that was a real concern because everyday it was a new record price. Now that's, in my opinion, probably third or fourth down the list.

The main issue that has surpassed that by far is the inability to get financing for retail customers. I think from a wholesale side, we've got people that are in the business that have now exited. I think the dealers are having a much harder time getting the flooring, they're looking at it that they're wanting the dealers to lower the inventory.

And, I mean, this has been so hard to be able to predict what is going to happen, and the dealers have the same situations. And we just aren't sure what's around the next corner, and those people that are doing what we have done and I've been out on the road and visited several dealers over the course of the last 12 months and I can tell you that those strong dealers have realized this and some of them even realized it before it actually occurred.

But they're going through the same thing that we are. They're reducing expenses, laying people off, consolidating. So, I go back to what we said before that we do feel we've got one of the strongest dealer body's around and from what I've been able to perceive in our visits to the dealers, that they're taking this thing very seriously, and they're trying to, I guess, right-size to what they feel this industry is going to be well.

Kathryn Thompson - Avondale Partners

Two final questions, you touched on it just now a little bit with floor plan financing, but any comments on the floor plan financing landscape and has anything meaningful changed, or become more difficult over the past 60 days? And then finally, there's the Q4 revenue, one way, the best way to think about the upcoming quarter?

Sarah N. Nielsen

On the first question, from the wholesale financing standpoint, obviously with the exit of T Bank, that's not a positive thing for the industry. For us specifically, they didn't have a very large market share of the dealers we work flooring our product. But it's still not a good thing to have another choice eliminated, both at the retail and at the wholesale level.

I think that it's challenging for dealers to find a new flooring source, and I think that they're experiencing headwinds on the interest rates that they're going to be paying or have been paying, because all of the financial institutions are looking to better cover their cost to capital.

They've had a lot of volatility going on and other issues to contend with. So, I think it's very challenging and it's deteriorated in the last 60 days, and I don't see it to improve here near-term. So, that was, I guess, my thoughts on your first question.

Robert J. Olson

And I guess just to jump in on that as well, I know when we've been on out on the road, we've heard dealers tell us that the lenders are cutting a little bit of their line of credit. And I think in an effort to reduce or force them to reduce their inventory levels, but we've also heard that the cost of that money to have for their flooring is also starting to cost them more.

Kathryn Thompson - Avondale Partners

Any sense of the magnitude of that cost increase?

Robert J. Olson

Not specifically. I really hate to answer that, because I don't know if it's different for each dealer and they never really shared anything with us, other than their costs were going up because of it.

Sarah N. Nielsen

And then what was your second question, Kathryn.

Kathryn Thompson - Avondale Partners

Is the Q4 revenue run rate kind of the best way to think about the upcoming quarter?

Sarah N. Nielsen

Well, obviously you can see our backlog position is significantly lower and at least maybe more in line with the delivery that we saw in the fourth quarter. We don’t see any change in the first part of ’09 that would move that needle significantly.

As Bob has touched upon until we feel that the dealers have reduced their inventories to a level they are comfortable with, we’re going to still be challenged from an order stand point at the factory and the point that you brought up how much inventory is going back into the channel through other means is an added pressure here.

And that’s assuming all the manufacturers we have today are still here and that’s another red flag for C2.

Robert J. Olson

Thank you.

Operator

You’re next question comes from Paul Burton – RBC Capital Markets.

Ed Aaron - RBC Capital Markets

It’s actually Ed Aaron, good morning guys.

So I just wanted to revisit just the post cost cutting recession efforts that you guys have done just trying to understand the margin sensitivity to changes and demand. Could you give us like some framework for thinking about and what the incremental margin would be, assuming $1 dollar of sales loss on a year-over-year basis -would translate into x number of cents in terms of lost operating profits opposed to those changes that you've made?

Sarah N. Nielsen

Oh, that’s a really tough question. To sort of speculate, what you see in our financials in, granted the fourth quarters are kind of a tough one to look at because other things were going on with the closure, but when revenues are down 64%, I mean, expenses are now in the mid-30’s to the mid-20’s we can’t cut back now.

And so we’re still looking to further cut back our fixed cost structure in 2009 on top of what we’ve already done because we’re not there in relation to what we need to be. If this is the run rate we’re going to be perspectively.

Now, we don’t think that we’re going to be at this run rate for an extended period of time, but we’re not interested in building open inventory and further exacerbating that side of the equation, so I don’t think I can give you a example correlating marginal intact at this point [inaudible].

We're still contending with a very fierce discounting promotional market place and that adds to the pressure from a margin perspective outside of the just a volume play that we have going on. So I don’t think I have a very good answer for your questions.

Ed Aaron - RBC Capital Markets

Fair enough. On the – in terms of the balance sheet inventory, I know that you had targeted a number of closer to $100 million and obviously, I don’t think anybody anticipated the magnitude of the let down that we saw between when you last talked to us and now. But in light of kind of the current environment and when you think about where you want your factory inventory targets to be over the next couple of quarters, what’s kind of a reasonable number in terms of a goal?

Sarah N. Nielsen

We have significant goals internally and reducing inventories. I hesitate to speculate because obviously we didn’t reap the $100 million by the end of this fiscal year, but from a work in process stand point we’re seeing continued improvements as we continue to pull back on what we’re doing.

We saw that already at the end of the fiscal year. I guess an example of a point in time not that long ago we were at $77 million at the end of ’07. There’s no reason why we can’t be well under a $100 million in this kind of market place if we can successfully move this, and it's good inventory, to the dealers lots.

And that's our added challenge here. We can contract buildings but we still have the finished good inventory that needs to be sold but we have very significant goals and I guess I’ll just point to a recent past where we were under $80 million from comparison point, but we have more work to do there and it’s a way to generate some liquidities without tapping into borrowing and it’s a focus internally that's significant.

Robert J. Olson

Yes, I get to add to that, Ed. I put a lot of heat on our folks to do whatever we can to reduce inventory because Sarah's point about that if you can lower those inventories, the need for cash is less. But in this environment it’s very difficult and I’ll give you a couple of examples, a work in process we have been able to bring down pretty substantially and part of that’s come from decisions that we have made over the closure of Charles City.

But we’re also trying to do is more by reducing our inventory goals through our manufacturing process which will help. Now you get to the finished goods and like Sarah says, we are – we've had and will continue to have a philosophy that we’re not going to build any anticipatory inventory.

But what will happen is that we will get orders and we’re like everybody else in this industry, there are no cancellation policies in place, so if a dealer orders one two months ago and then turns around and decides that he doesn’t want that then we have to look for other places to put that unit.

So that makes that reduction of finished goods inventory a little bit tougher. Now, I'll go to the raw material side, which includes our chassis that with the reductions that we have seen in the fourth quarter for demand for our product, to lower that inventory makes it extremely difficult as well.

And, part of that as Sarah has said in previous conference calls, our chassis inventory is partly with a [sprinter], which is a very, very, very long leap time item. So to shut that supply chain off is a lot more difficult. So it’s all going to really resolve around how the appetite for dealers and the retail customer to order the products once we get through this economic crisis that America is in right now.

Ed Aaron - RBC Capital Markets

And then one last question Sarah, just over the next one or two quarters if we were projecting further losses what might we assume for a reasonable tax rate on those losses?

Sarah N. Nielsen

Well, we had a really unusual year for ’08, but if you put aside the kind of one-time settlement and various items that we did, we had an effective rate on the loss of in excess of 60% and that is primarily due to the fact that financial income that we earn is primarily tax free, based on how it’s invested.

And, so, that’s additional deductible or not taxable item, and so that has a dynamic of increasing the benefit or reducing the rate in times of where we're earning income. So it’s hard to project in relation to where that will be because it’s completely dependent on what you’re dividing it into, but I guess that’s a little bit of more info on where we were in 2008 to use for planning for 2009.

Thank you.

Operator

Your next question comes from Craig Kennison of Robert W. Baird.

[Mark] - Robert W. Baird

Great thanks this is actually [Mark] in for Craig] Couple of questions, first on the $19 million in savings that were discussed, and how much of that is coming out of the SG&A lines? And then going forward, what should we look at as kind of a fair bones level for SG&A?

Sarah N. Nielsen

I would even bet $12 million that we incrementally have in 2009, in addition to what was already done in 2008, about half of that is in the SG&A area to answer that question. We think that on perspective basis there’s more to be done and we’re in the midst of those kinds of actions, but that’s I guess a break-out of how to look at the savings that we will have on top of what we have already done [inaudible].

[Mark] - Robert W. Baird

And then, I guess this question's for Bob. How much capacity have you seen come out the entire industry over the past few months and then how much do you think needs to come out in order for the remaining manufacturers to operate properly in this sort of environment?

Robert J. Olson.

Well, that’s also a very difficult question. I mean we’ve seen a lot of manufacturers go by the wayside just since last year’s legal show. I mean we’ve had national RV, Western RV, Travel Supreme, Weekend Warrior, you can go on and on and on, but there’s been some capacity taken out. I know – take us, for example, we’ve taken 30% of our capacity out with Charles City.

You’ve got the other competitors out there, the manufacturers that they’ve also made announcements that they have closed down several of their facilities. So we at one time as an industry were looking at 70,000 plus capacity in this industry, and to say that 50% of that is gone now I don’t know.

I can only tell you what we’ve done and I’m not sure where the other manufacturers are, but between what we’ve done, what some of the other people going out of business have done, there is substantially less capacity available in this industry. Is it enough?

Tell me where the industry is going to end up leveling off at and I could probably answer that question, but you look at what Dr. [Curtain] has forecasted, he is still with A, C’s and B’s at 32.5 and you look at some of the wholesale numbers annualized over the last few months and it’s probably closer into the lower 20’s.

And, so, again this is one of the toughest down turns I have ever been associated with to try to forecast and predict and you’re question is valid, but I don’t have a good answer for you because I just don’t know where the industry is going to end up and how much has already been taken out.

[Mark] - Robert W. Baird

Okay that’s fair. I have a couple of other questions. Coachmen just recently announced that a new distribution agreement with Gamble RV. Have you looked at that agreement and does something like that make sense for Winnebago?

Robert J. Olson

To be honest I have not had a chance to really look at that I think that was just announced here in the last couple of days, and to be honest we’ve been tied up with our Board the last couple of days, so we really haven’t had time to do anything as far as looking at the outside world and what some of the competition’s doing.

Operator

Your next question comes from Bob Simonson –William Blair.

Bob Simonson - William Blair

On the cash flow out look for next year, there’s a plus in that you, glad you're able to pay the dividend. You’ve got something approaching $10 million in depreciation. Last year and the year just ended, your current liabilities went up $61 million, and your current assets went up 95, so you needed an incremental $32 million, piggy backing on [Ed’s] question can you net it out?

How much do you think you can take out of networking capital in 2009? An approximate amount or can’t – maybe it just can’t go down too much?

Sarah N. Nielsen

I think we have a significant opportunity in relation to inventories in 2009 and in relation to reductions. Our receivables are at a very, very low level so if there is an pickup in business that’s going to actually increase.

And, one of the dynamics we had at the end of the fiscal year late, was a pre-sizable tax receivable, which also was a negative working capital drained for us this past year. And we looked at – we had some significant opportunities primarily with inventory and if we see that pickup on any kind of business at the latter part of 2009, I would say that whatever the increase in AR would be, will offset by the growth and currently liabilities in the AP and accrued area. So, if that gets primarily and depending on how successful we are in moving inventories down.

Bob Simonson -William Blair

Would it be your anticipation that, that would be instead of a negative 32, a positive number in ’09? Or is it…

Sarah N. Nielsen

Yes, yes, Bob. If we yes, intend to reduce inventory levels and that would be a cash flow generator for us in ’09.

Bob Simonson - William Blair

So, if my number not yours, if you were to lower your net working capital [inaudible] by $10 million this year if you had roughly $10 million in depreciation and amortization, that would shield $20 million in net losses.. If it were to be more than that what are your financing? You’ve still got cash, how would you finance any needs? You’ve got some commercial paper I think you set up or...?

Sarah N. Nielsen

No, we entered into a line of credit in September for $25 million to provide that additional flexibility if we had some working capital changes that needed to be absorbed, and we also, as I highlighted in the conference call during opening remarks, there is the ability to borrow on a portion of our auction rate portfolio through an agreement that one of our brokers has settled with the SEC and various states, and so that could provide a small amount of liquidity if we choose to borrow in that fashion.

But primarily it’s the, as you indicated, the [inaudible] of cash and investments and the short term classification at the end of fiscal year. We have on hand $25 million of borrowing capacity and then the working capital reductions we planned overall primarily in inventory that would allow liquidity for us in 2009.

Bob Simonson - William Blair

Very good and the other one I think I know the answer to this, but I’ll ask it anyway. Have you considered any plans to sell Charles City or just going to moth ball it until the business turns?

Robert J. Olson

Well, right now are intentions are to moth ball it. And, again, it all depends on just where does this market go? What is going to be the bottom and what is going to be the need for capacity? I’ve said this many times in the past and I will continue to say it, that going into this downturn that we’re in right now I have taken no out of my vocabulary, and if circumstances mean that we have to do something different with Charles City, then I wont say no.

I mean, it's just – this thing is so volatile right now from a standpoint of the changes every day that we need to stay very flexible. So I guess to answer your question, there hasn’t been a change of strategy, but that doesn’t mean there won’t be.

Operator

Your next question comes from Barry Vogel - Vogel and Associates..

Barry Vogel - Vogel & Associates

I know there’s been a lot of good questions and some of the answers I am not clear about, so forgive me for going back to certain subjects that have been asked already. The first question has to do with the inventory situation and I know it’s been asked by several people, and so the way that I am going to frame that is if we assume and this is really for Sarah.

If we assume that you’ll average for fiscal ’09 revenue of 80, what's it $85 million in the quarter, the last quarter, if we assume that you’ll average revenues of $85 million throughout the year as just an assumption, and knowing the inventory – knowing how your inventory reductions will fair in terms of the chassis as well as the finished goods, if you know your going to 80 –if we use $85 million in terms of shipment per quarter.

Sarah, I would like your best guess, not a generalization, because I know you’re a very smart lady, as to what would be your best guess toward the inventory reduction under those circumstances?

Sarah N. Nielsen

In regards to what we think we can do with inventory.

Barry Vogel - Vogel & Associates

Yes, yes, I want your best guess. You know more than we do.

Sarah N. Nielsen

Ending the fiscal year at a little over a $110 million, I go back to my earlier comments on one of the other questions. We’ve been at $77 million and that was when conditions were much better than they are today.

That is a reasonable goal for us to be in the $70 to $80 million range and that’s what we’re working very hard to – as you point out, depending on what we’re actually shipping and where on the production and shipments are all year long, is a very dynamic – that’s our challenge is how much will the market bear in regards to that inventory that's there for us to be in that $70 to $80 million range. We’ve done it before and we can do it again.

Barry Vogel -Vogel & Associates

All right, so you’re best guess is that you might pickup $30 million in inventory reduction by the end of August for fiscal ’09? Right?

Sarah N. Nielsen

Yes, that’s a fair goal.

Barry Vogel - Vogel & Associates

Now, concerns of trying to run your business for cash, obviously, otherwise you would not have gotten $25 million line of credit, could you tell us what you’re capital expenditures would be, Sarah, for this new year and the [DNA] for this year?

Sarah N. Nielsen

We’re estimating capital expenditures for 2009 will be in the $5 million range. I’m not that far off of what we did in 2008. From a depreciation stand point, we’re estimating it to be slightly over $8 million for the year. It is down because of the impairment we recognized on Charles City and just the fact that we’ve contracted on CapEx so significantly in the past three years.

Barry Vogel - Vogel & Associates

Now as far as this savings thing. I've had companies where they do closures talk about savings because of head count reductions; however, there is a little twist in there because it’s not necessarily – just a pure head count reduction doesn’t seem to work exactly that way and again I don’t know the details of that, but I have had that happen to me.

So if we could look at the Charles City closure on its own and the fact that it is over essentially in August, and assume you don’t run Charles City in fiscal ’09, what would the savings be from – your over all savings be from not having Charles City operate in fiscal ’09 versus fiscal ’08?

Sarah N. Nielsen

Well, I understand your point on the complication of just looking up here, reduction of head counts and the savings, because unless that position and the way look at it, if it was a fixed overhead type of position, everything else is variable and obviously we don’t have the revenue associated with that location any longer, so you really had to take that off the table.

When we look at Charles City alone, there were positions that had been eliminated that do not need to be duplicated at Forest City that are true savings; and that they are included in there. On top of that, it’s primarily significant depreciation reductions, because we've accelerated and took a very sizeable charge in our fourth quarter.

The savings associated with Charles City alone are in that $2 to $2.5 million range out of the $12 that we’ve quantified for 2009. It’s not a significant portion of the overall total, but it was a relevant part of the process.

Barry Vogel – Vogel & Associates

So if we use $12 million as the number to use, where does the other $9 million come from?

Sarah N. Nielsen

Well, as I mentioned earlier, overall, because of all the positions we’ve eliminated company-wide, that are a fixed nature, then salaried and fixed positions that no longer are in our cost structure. That was $8 million of the $12. On top of that, we’ve contracted all sorts of different things in relation to what we do in relation to advertising, or various expenses, how many people send to the various shows, it relates to all sorts of things that we’ve just contracted; and we don’t do what we used to do in certain instances because we can’t afford to.

Barry Vogel – Vogel & Associates

Really the number to use is $12 and not $19?

Sarah N. Nielsen

Well, $12 is what is incremental beyond ’08, and our fixed cost structure, because if you go back to our second quarter, we had a pretty set sizeable contraction in our work force and position eliminations that we did before the end of February. We already saw a half a year’s savings for actions that we had taken earlier; and so that’s $7 million of that fixed cost we already eliminated in 2008.

So incrementally, right, there’s only $12 more in 2009, but this has been a process we’ve been living for, feels like quite a long time now; and it’s relevant to what we’ve already accomplished, but there’s more to be done.

Barry Vogel – Vogel & Associates

So, are you saying that during fiscal ’08, the average savings that you accomplished were about $7 million of fixed cost reduction; and the total for fiscal ’09, might be $12 million, which means incrementally it’s only $5 million dollars.

Sarah N. Nielsen

No, I said that we did $7 million in 2008, and incrementally, we have $12 more million in 2009.

Barry Vogel – Vogel & Associates

So the total will be $19 million total.

Sarah N. Nielsen

That’s correct.

Barry Vogel – Vogel & Associates

Of fixed cost eliminations as we speak; and you’ll have incrementally another $12 million to do next year?

Sarah N. Nielsen

Yes.

Barry Vogel – Vogel & Associates

I mean, so that's what [inaudible] in savings in the year. Now, as far as the question about dealers going bankrupt and repo’d, can you tell us specifically how many units have been brought back or have been given back to Winnebago through September of ’08?

Sarah N. Nielsen

We will be filing our 10-K and including all of that information in relation to repurchase obligations, but in regards to what we’ve done so far, I don’t have that disclosure handy here. Well, actually, I do. In 2008 we bought back 36 units.

Barry Vogel – Vogel & Associates

And how many dealers have been gone bankrupt? How many of your dealers have gone bankrupt, so far?

Sarah N. Nielsen

Four.

Barry Vogel – Vogel & Associates

Four; and how many dealer locations do you have left?

Sarah N. Nielsen

At the end of fiscal ’08, we had 280 dealer locations, compared to 285 locations at the end of ’07.

Barry Vogel – Vogel & Associates

Now, bear with me one second, because I’m going back here, as far as the tax rates, I know you gave an elaborate explanation of the fiscal ’08, but let’s assume you lose money in fiscal ’09, what should be the tax benefit rate approximately?

Sarah N. Nielsen

I would say plan for a 35% rate. I expect it probably will be higher than that from a benefit, because of our financial income that’s not taxable, but I would say conservatively, that’s the best way to look it.

Barry Vogel – Vogel & Associates

Now going back to the reserve question, and you did a very good job of doing a tap dance, you’re a good dancer, you know what your reserves are at the end of the year, am I correct?

Sarah N. Nielsen

Of course we do.

Barry Vogel – Vogel & Associates

Then why don’t you tell us?

Sarah N. Nielsen

The reserves associated with our repurchase obligation at the end of the fiscal year were slightly over $600,000.

Barry Vogel – Vogel & Associates

Dollars?

Sarah N. Nielsen

Yes.

Barry Vogel – Vogel & Associates

So that’s practically nothing.

Sarah N. Nielsen

When you look at what we had on the financial statements at the end of last year, it was significantly less than that. Our experience of losses over the years have been very low; and so percentage-wise, we increased that reserve fairly significantly at the end of fiscal year, but we have a history of a not significant losses.

You have to take into consideration that when we repurchase a unit, if it’s beyond six months we buy it back at 90% of invoice; and if it’s nine to 12 months, it’s 80% of invoice. So there is an element of reduction already imbedded into the repurchase price.

Barry Vogel – Vogel & Associates

But let me ask you this question, we’ve never seen a situation like this in the post-war period, so all your historical experience, it might not be valid going forward, and I’m just trying to be realistic here.

Sarah N. Nielsen

We look back to as far as the late ‘80s and early ‘90s on horrible time parameters and where our losses have been there. So, we used the information we thought was reasonable in this light.

Barry Vogel – Vogel & Associates

I hate to ask those questions, it’s almost like we’re doing bank analysis here about reserves, but I think there’s a good chance that your reserves will have to be raised. That’s all and I think you’re doing a good job; and it would be nice if you could raise some cash this year and despite everything, not lose too much money.

Robert J. Olson

That’s our main goal, Barry.

Operator

And that does conclude the question and answer session. I’ll now turn it back to Mr. Bob Olson for closing remarks.

Robert J. Olson

I’d like to thank everyone for joining in on Winnebago Industry’s conference call today. We look forward to talking to you again in December when we report our results for the first quarter of fiscal 2009.

Operator

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

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Source: Winnebago Industries, Inc. F4Q08 (Qtr End 08/30/08) Earnings Call Transcript
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