Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Winnebago Industries, Inc. (NYSE:WGO)

F2Q09 Earnings Call

March 19, 2009; 10:00 am ET

Executives

Robert Olson - Chairman, Chief Executive. Officer and President

Sarah Nielsen - Chief Financial Officer and Vice President

Sheila Davis - Manager of Investor Relations, Public Relations

Analysts

Katherine Thompson - Avondale Partners

Craig Kennison - Robert W. Baird

Scott Stember - Sidoti & Company

Barry Vogel - Barry Vogel & Associates

Richard Cain - Unidentified Company

Operator

Good day ladies and gentlemen and welcome to the Winnebago second quarter 2009 earnings conference call. My name is Onika and I will be your operator for today. At this time, all participants are in a listen-only mode. (Operator Instructions)

At this time, I would now like to turn the call over to Sheila Davis, Public Relations and Investor Relations Manager. Please proceed.

Sheila Davis

Thank you, Onika. Good morning and welcome to the Winnebago Industries Incorporated Conference Call to review the company’s results for the second quarter of fiscal year 2009, and February 28, 2009.

Inducting the call today are Bob Olson, Winnebago Industries Chairman of 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 641-585-6803 following the conference call. Before we start, it is my responsibility to inform you this presentation may contain certain forward-looking statements within the meaning of the Private Securities Litigation 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 identified in our 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’ll now turn the call over to Bob Olson.

Robert Olson

Thank you Sheila, good morning and welcome to Winnebago Industries Second Quarter Conference Call. With the continued news of troubled banks, home for closures, stock market volatility, government bailouts, and unemployment rates rising, consumer confidence levels continue to fall to record levels.

Unfortunately, the nation’s economy has not improved as many of these same topics were discussed during our last call. These issues resulted in continued deterioration in the marketplace and resulted in our second quarter of fiscal 2009 being negatively impacted.

Our second fiscal quarter is historically the most difficult of all quarters, due to its seasonality with the Christmas and New Year’s holidays typically reduced demand for our products and the fact that we incur higher utility and maintenance costs during this quarter.

Lower Motor Home shipment volumes increased incentives and a less favorable mix of products sold resulted in lower revenues and a loss for the quarter. Obviously, depressed economic conditions in what is turning out to be the number one issue in our industry today, a difficult credit environment, continues to negatively impact our business.

While we were pleased that motor homes were included in the federal stimulus package, as well as the Federal Reserve’s health program, we are not yet seeing that these programs are working as intended. Again, I repeat, credit at both the wholesale and retail levels remain the number one issue facing our industry today.

Although this has been a difficult quarter not only for us, but the entire RV industry, we did benefit from lowering our inventories and obtaining a $9.1 million no net cost loan from UBS, which was secured by our auction rate securities held with them. Sarah will get into more detail about the financials in just a moment.

From a fiscal quarter perspective, dealers have continued to reduce their inventories due to lack of available floor planning and financing for the new product. Consequently, inventory at Winnebago industries products on our dealer partners’ lots has declined 11% sequentially since last quarter and 40% as compared to a year ago.

The decline in the net worth of the buying public is also a growing concern. As consumers heal their personal balance sheets with increased saving, they are delaying their purchase of discretionary products such as motor homes. As a result of the decrease demand at the retail level and decreased orders from the industries dealers, wholesale shipments for motor homes have declined dramatically with the decline accelerating throughout the past few months.

Wholesale shipments of Class A and Class C motor homes industry-wide declined 49.5% for calendar year 2008, 75.2% for the fourth calendar quarter of 2008, and 80.6% for the month of January, 2009. Retail sales while not as drastic are still down considerably with a decline of 41.6% for calendar year 2008, 54.8% for the fourth calendar quarter of 2008, and 58.4% for the month of January.

RVI’s economist Dr. Rich Curtin from the University of Michigan has revised the industry’s calendar 2009 shipment forecast downward in his latest forecast to 14,100 Class A, B, and C motor homes for 2009, a 51% decrease from actual shipments of 28,300 motor homes in calendar 2008.

This forecast is by far the lowest we have on record for the industry, with data available back to 1971. We continue to see a very active promotional environment in the marketplace, both from a wholesale and retail perspective, with some manufacturers selling the low cost for the benefit of cash flow. It’s extremely challenging to compete profitably in a market of this nature.

In order to manage through this difficult environment, we continue to adjust our production capacity through reduced work schedules for our employees. All of our hourly and salaried employees were required to take a one-week furlough during the second quarter and another one-week furlough is scheduled for our fourth fiscal quarter.

We also have salary deductions throughout our salaried workforce with a 3% reduction in most salaries, 10% for our Vice-President’s, and 20% for my position. Further cost reductions continue throughout the corporation with fixed cost reductions in excess of $21 million now anticipated to be realized in fiscal 2009.

We will continue to investigate other cost savings throughout the months ahead. We continue to work on reducing our inventory levels and we’re pleased with the $10.5 million reduction during our second quarter. We have further opportunities in that area going forward, which will in turn generate additional cash flow.

As discussed in our last conference call, we also suspended the stock dividend payments starting in our second quarter of fiscal 2009, which will amount to a cost savings of $3.5 million per quarter. Even though decisions like this are extremely difficult, it is these decisions and many others we have had to make the last few months that will allow us to manage through these very challenging times.

While several major competitors currently face very difficult financial circumstances, we are confident of our financial strength and competitive position in this economic recession. As the top selling motor home manufacturer, we are in an enviable position with strong brands and recognition as a leader in high quality and innovative products.

We also have the financial stability to withstand this downturn with a strong balance sheet and no long-term debt. In the short-term, however, we know we will have added competitive pressures from highly discounted product in the marketplace from struggling manufacturers.

We also know it will take time for this distressed inventory to work its way through the dealer channel, but once that is accomplished, Winnebago Industries will be in a great position to take advantage of customer demand in an industry that appears will have less capacity.

It is my belief that when the housing market is finally corrected, the stock market recovers and personal balance sheets improve with increased savings, the U.S. consumer’s sense of wealth will improve and normal spending patterns will return.

Lending institutions will free up capital for RV consumer loans, once again realizing these are quality customers with timely payments and low default rates. Once that happens, we will have enough demand for our products that will be a challenge to satisfy. We welcome that challenge.

This recession has been one of the most difficult periods I have seen in my career, and although there continues to be many negatives reported daily by the media, there also appears to be some signs of improvement.

Oil prices continue to be relatively low, and just as important, they are stable. Interest rates continue to be at historically low levels. Banks are starting to report they are actually making money. The dollar remains relatively strong. Investors are beginning to wade back into the equity market. The severity of this recession was first felt by the RV industry in April 2008.

We are quickly approaching the 12-month anniversary of these very difficult times. Even though none of us know for sure when this recession will conclude, we do have a good portion behind us based on the length of previous downturns. I am not saying the recession is over, but there may be positive signs starting to appear. With that said, we should never lose sight that this recession occurred at a speed never seen before, and, who knows, we could see a recovery just as fast. With that, I’ll turn the call over to Sarah for the financial review. Sarah?

Sarah Nielsen

Thank you, Bob. I will now review the financial performance for the company’s second quarter of fiscal year 2009. Revenues for the second quarter were $31.8 million, an 80.6% decrease in the second quarter of fiscal 2008. This was primarily a result of a decrease in our motor home delivers of 1,382 units, or 81.4%.

Industry wholesale motor home shipments as reported by RVIA for the first two months of our fiscal quarter were down 82.4% as the RV market further deteriorated in December of ‘08 and January of ‘09. The decline in wholesale shipments for the industry is a direct result of a very challenging retail market that has declined 55.6% in that same timeframe as well as a disrupted credit market.

During the quarter, we also had a number of retail incentive promotions in place to help stimulate dealer retail traffic with negatively impacted revenues. Retail promotional allowances increased 5.5% as a percentage of net revenues as compared to the prior year.

The retail programs had ad a substantial impact in helping to reduce our dealer inventory levels, but at a substantial cost. Our average motor home selling price net of discounts decreased 2.6% in the quarter as compared to last year. This was due to an increase of product incentives we offered at the wholesale level, and also due to a shift in mix.

Our sales mix for the quarter was more heavily weighted to lower price products as 61% of our volumes in the quarter were Class C and B products as compared to 51% of our quarter last year.

Lastly, revenues were also negatively impacted by $1.4 million due to additional inventory repurchase activity. During the quarter, we bought back 18 units and resold 28, incurring a loss of nearly 500,000. This is similar to the loss that we incurred in the first quarter.

As a result of this continuing negative experience, the reserve associated with repurchases was increased to $2.7 million from $1.7 million. Lower motor home volume resulted in inefficiency due to the utilization of our manufacturing facilities and low fixed cost absorption.

These negative items along with the increased promotional incentives at the retail and wholesale level resulted in a gross margin loss of 37.1% in the second quarter as compared to a gross margin of 7.4% in the prior year. Selling expense decreased $1.4 million or 33.9% in the quarter due to reduced wages and bonuses, reduced advertising expenses related to direct marketing and retail shows and other various cost cutting measures.

General and administrative expenses decreased from $1.5 million or 26.6% as compared to the same quarter last year. This was primarily a result of a reduction in litigation and product liability related expenses and reduced wages and stock-based compensation expense. Note that in the second quarter of last year, approximately 500,000 of severance related costs were included within G&A associated with the job eliminations that had occurred.

I will now highlight a few significant balance sheet items. As discussed on our first quarter conference call and disclosed in our quarterly SEC filing, we signed a legal settlement agreement with one of our auction rate security brokers that allow us to put the $13.5 million that we hold with them back to them at par as soon as June 30 of 2010.

The terms of the agreement also allowed us to borrow on a portion of our portfolio at no-net cost, and as a result, we borrowed $9.1 million under this arrangement which is presented at short-term ARS borrowings on our balance sheet. Terms of the legal settlement provide us with the ability to name the no-net cost loans until that securities are either liquidated or they reach the June 2010 put date.

In regards to inventory, we ended the quarter with $72.8 million, a reduction of $10.5 million, or 12.6% from inventory on hand at the end of the previous quarter. This was due to an $11.2 million reduction in raw materials primarily a result of chassis utilizations, a $1.8 million reduction in finished good inventories, which was partially offset by an increase in our work in process materials.

As Bob indicated earlier, we are very pleased with the further progress we have made during the quarter on inventory reduction. On a trailing 12-month basis, our inventory levels have been reduced by nearly $56 million. We estimate that we could see another $10 million reduction in inventories in the next two fiscal quarters.

At the end of the second quarter, we had generated an income tax receivable of $19.5 million, primarily due to the current year’s loss, which we have the ability to carry back to our fiscal year 2007. We did file our fiscal 2008 federal tax return during the quarter, and in early March, after the end of our second quarter, we received a federal tax refund of $5.4 million.

As mentioned in our earnings release, we have continued to reduce our fixed cost structure and over the past 12 months and expect fixed cost reductions in excess of $21 million to be achieved in fiscal 2009 as compared to last year. Numerous actions have been taken thus far, which include headcount reductions of approximately 50%, the salary wage reductions effective March 1 of 2009, elimination of 2009 stock plans and bonuses, reductions to the 401 K company match, the two mandatory unpaid weeks off, and cancellation of certain promotional events that we typically hold.

Additional cost reduction activities will continue during these challenging market conditions. I will no turn the call over to the operator to the question and answer portion of the call.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Katherine Thompson - Avondale Partners.

Katherine Thompson - Avondale Partners

I want to first focus on inventories at dealer lots right now. In your opinion, how many months of inventory do you think there is in this build given current run rates, and what is really normalized dealer inventory given the current market?

Robert Olson

Well, I think that’s a very difficult question to answer, Katherine, because, we’ve been monitoring our dealer inventories out there and a year ago, we thought it was going to be one level. As time progresses and the dealers continue to keep lowering them, I will say we’ve blown by that number that we thought it was a year ago and it just continues to decrease. I think it is going to end up being that you’re going be looking at turns that are going to be two-plus for the dealers.

I think the financial community is going to demand that. I will say that we’ve got a little ways to go yet, but we’ve made significant in-roads to that, as reported before. We’re down over 40% from last year at this time, and I think we’re getting closer, but it’s really one of those things that it is a hard one to get your arms around.

Katherine Thompson - Avondale Partners

What were the turns in the peak market, and what have turns been in the quarter that you just reported?

Robert Olson

When things were really cooking back in 2004, we were looking at turns that a little over two. I think right now, we would be pushing to say we are getting one turn a year.

Katherine Thompson - Avondale Partners

How are dealers going to be incentivized to increase turns to essentially doubling their turns?

Robert Olson

Well, I think they have got to lower their inventories, and I think their lending partners are forcing them to do that, and we’ve seen, as our dealer inventories continue to lower, we’re seeing improvements in those turns, but it’s going to be, we still have to get more units off the dealers’ lots and/or have retail pick up, and I would much prefer the latter, of course, and as I mentioned in our prepared rashes, there are some signs of some positives going on out there, that that along with the spring selling season that we’re hopeful we’re going to start see some of that retail pick up, which we already have.

When you look at what retail was from November, December, January, and we’ve had a steady growth up through those months, and I don’t think it’s so much a part that the economy is improving at great leaps and bounds, I think it’s more of a case that it’s more seasonal, because we are into the time of year that retail does usually pick up.

Sarah Nielsen

And I would clarify from a retail standpoint, the improvement we’re seeing is on a sequential basis not year-over-year comparison. I mean we’re monitoring that daily and weekly, and we always expect retail to continue to accelerate as we get closer to spring, and even though we’re at levels that are abnormally low, there have been sequential improvements in the last 8 or 9 weeks.

Katherine Thompson - Avondale Partners

Are you running into a situation where orders are getting turned back due to dealers not being able to secure enough floor plan financing?

Robert Olson

We have had some of that, but I think you can go back even when times were even better than they are now and you would have some of that, maybe not so much to the fact that they couldn’t get the financing, but for different reasons that you put something into production and the order would get canceled. We have seen some of that now and part of it has to do with financing.

Katherine Thompson - Avondale Partners

Well, just given kind of relative, has it progressed? I mean, what’s an update for the current month? And has that trend accelerated, or has it remained the same over the past three months?

Robert Olson

I think it’s been pretty constant over the past three months. I think the dealers are a little bit more cautious now before they place an order. I think they want to make sure that their inventories are online before they actually place an order with the factory. When things were really cooking in this industry, a lot of dealers would throw orders in just to get their place in line secured, and obviously with the low production rates that we’re running right now, that’s not an issue for them, and so I think the dealers are being extremely cautious when they do place orders, and so I really don’t think there’s been a big up tick in that phenomenon.

Katherine Thompson - Avondale Partners

And the change in the current month?

Sarah Nielsen

Well, I would point on a comparative basis, if you look at the beginning of this fiscal year, we had a little over $41 million in finished good inventories, and that moved down to under 35 at the end of our first quarter, and now we’re under 33. So regardless of some of those dynamics, which are real and have happened, when you have a backlog as low as you can see that we have, and we did have at the end of first quarter, so much of that that squeezed out of the system, we have very, very good visibility of each single order, because we’re dealing with such small levels, and we’re continuing to work our finished good inventory position down. So it’s a function of the times more than it ever has been for the flooring to be a reason for an order to be canceled, but it’s not a significant part of what’s happening with our backlog.

Katherine Thompson - Avondale Partners

Okay. Just shifting gears to your cash preservation, you did a great job just particularly in the inventory time in terms of cash preservation. Do you think you’ll need to tap into your line of credit in the current fiscal year?

Sarah Nielsen

Well, due to the fact that we had the ability to tap into our auctionary securities in a different format, we’re currently looking at the next two quarters to be still in a similar level to where we’ve been, and we don’t anticipate having to borrow on the line of credit. Now, things could dramatically change, but we wanted to have some of that flexibility in place, in case there is working capital ups and downs, but we are very closely watching that day-by-day, and are happy thus far to where that’s at.

Robert Olson

Yeah, I think the other thing on top of that, Katherine, is that we’ve got a plan in place right now that is really, really conservative, so if we see any kind of an up tick in business, which we are confident that with some of the positives that are out there right now that we could, it’s going to mean that not having to tap the line of credit at all. So that’s our hope right now is that we have put together a plan that’s as conservative as we think it will be, and it might end up being better than that.

Katherine Thompson - Avondale Partners

Okay. And, also, any trends in the repo market? What are you seeing there?

Robert Olson

Well, we’re hearing reports from a lot of different shows. It’s spotty; I will say we’re hearing mow positives than we are negatives. Attendance appears to be up in a lot of the different shows. There have been some buyers at the shows that are serious about doing it. With that said, I will also say that when you compare it to other years, we’re still not seeing the kind of activity that when things are extremely good, but we’re getting good reports out of the shows and with some of the discounted product that we’ve got out there, whether that be from other manufacturers or whether it be from the repo market, I think that is, if you are a customer right now, it is an absolute great time to buy RV, because I doubt very seriously you’re ever going to find a better deal than you would out there right now.

Katherine Thompson - Avondale Partners

And my final question is what is your current capacity utilization?

Robert Olson

Well, as I reported last time, we’re looking at it in a couple of different ways right now. The typical way that we’ve always looked at it is with facilities and equipment, and I’m sorry to say that it only ran around 15% for the quarter. If you look at it based more on a staffing situation, we did run in the low 50% range.

Operator

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

Craig Kennison - Robert W. Baird

To begin with, could you give us the ASP data?

Sarah Nielsen

For the second quarter, for AGAS, we had 95,000, 2013. Diesel was 159844 and total A combined with 118926. Class C was 69,535. Class B was 65,000. So the total was 88,549.

Craig Kennison - Robert W. Baird

Could you give us an idea of your fixed cost level at the cost of goods sold level, and the SG&A level, and then where you think your break-even is?

Sarah Nielsen

In regards to our fixed cost structure that we look to be included within our cost of goods sold; we’re currently looking at 2009 to be in that $40 million to $43 million level. SG&A we look at all to be fixed. There are some elements that move up and down, but for the most part, we just look at those two line items to be fixed. So in aggregate, you’re all in looking at that $70 million to $74 million range, in regards to the fixed cost structure. To compare and contrast, where we are in previous years, that’s our bogey in regards to the $21 million that we’re pulling out, and what we have pulled out thus far.

Break-even-wise, we look at on a normal ASP level, so I’m looking at an average selling price without substantial discounts. Our break-even is in the range on a quarterly basis of 1200 to 1400 units. That’s improved sequentially a bit, but obviously not to the degree of the shipments that we’ve had in recent quarters, and so we are not done in our efforts on what additional fixed costs we could pull out.

Craig Kennison - Robert W. Baird

Could you quantify the discounting environment?

Sarah Nielsen

For competitive reasons, we don’t want to get into that detail. When I commented on our ASP as compared to a year ago, we see that the 2.6% decline to be primarily a function of discounting, partially a function of mix. The retail incentives that are in place that we have programs active to help reduce inventory levels, have been substantial, and I commented how that, as a percentage of revenues, your quarter-over-quarter that is 5.5%, and the third category of this repurchase dynamic is also a net revenue reduction, and that’s been significant, but the promotional environment, as you might imagine, in regards to what’s happened in our industry and what has probably yet to play out, has been pretty significant.

Craig Kennison - Robert W. Baird

And talking about your dealers now, how main dealers have you lost? And is there an opportunity to add dealers as some of your competitors exit the market? And maybe if you could just quantify the market share opportunity that you may see unfold over the next couple of years?

Sarah Nielsen

Well, from a dealer location standpoint, we had 280 dealer locations at the end of August and at the end of our second quarter, we are at 255 dealers. So we lost 25. That’s about a 9% reduction in dealer locations. Some of our dealers are just choosing to exit the business. Some are running into financial troubles. There’s a variety of reasons. So there’s contraction and distribution points that’s driving some of the dealer inventory decline, but, now there’s obviously new factors to consider in regards to what will happen prospectively with some of the other product categories.

We looked at, especially in regards to what our dealers carry of other product lines, so we understand what opportunities we have for added shelf space, potentially and, also on the other side of the fence, what’s our risk if these dealers are going to be very - they have additional challenges ahead of them in light of some of the recent announcements.

There’s a lot of opportunity I think long-term, but short-term, it’s probably going to be more pain on the retail market share standpoint, because there’s a lot of product that’s got to get blown through the channels, similar to what we saw with national RV, and that took, you still see a few units come through each month, and all the other manufacturers that have closed their doors. So we see that there’s significant opportunity, but it’s hard to quantify when and how much until we see a little bit more how things play out.

Robert Olson

Yeah, I think to add to that, Craig, is that we’ve looked to see in our dealer network what we share with other manufacturers, and I think that’s going to be our real opportunity, because we’ve worked very hard over the years to make sure that we’ve hit the open points throughout the United States, and we think that we are in pretty good shape there. But where the real opportunity is going to come from, is the fact that as this distressed product goes through the channel, and if we have more manufacturers go out of business.

And we’re already seeing the fact that a lot of the dealers are looking at this and saying, ‘maybe I do need to take a closer look of who I’ve hitched my wagon to, and make sure that I hitch it to somebody that’s going to be around for the longer run.” And as that distressed product goes through the channel, I think we’ve got a better opportunity to pick up more shelf space because of that.

Craig Kennison - Robert W. Baird

If you were to say that the distressed product would be product from manufacturers that are no longer producing product, how many units do you think are out there in the market that we need to clear?

Robert Olson

Well, that’s a good question. We’ve made some stabs at that, but it’s just our opinion. We really have no data to substantiate what that number is. We think it’s significant, obviously, but we look at some of the other manufacturers that have gone down earlier, and when you look at what piece of the overall industry they had and how long it’s taken for that inventory to get through the channel, and then you compare some of the inventory that’s probably out there by some of the later announcements, it’s significantly a higher number, and it could take longer for that to get through the channel, but with that being said, I think there’s much more aggressive pricing going on right now, so if the economy does turn around, you might see more active buyers trying to pick up a good deal.

It’s going to be an interesting time, because you have got to weigh cost versus after market support and those types of things, but we think if it plays out like it could possibly play out, there might be quite a bit of inventory out in the dealers’ channels that has to get retailed.

Craig Kennison - Robert W. Baird

Would you think it would take the entire selling season to make a dent in that?

Robert Olson

I don’t know if it would mean to put a dent in it, but I think you’re going to be looking at least the selling season to get through everything that’s out there.

Sarah Nielsen

I think it could easily be 12 to 18 months if you were truly liquidating all that inventory.

Craig Kennison - Robert W. Baird

Bob, in the past you’ve talked about trying to do what you can to fill your factories with perhaps some non-RV projects. Can you first of all, address that, and second of all, given the exits in the total markets, just address whether that you may rethink your view on Winnebago’s place in the total market. Thank you.

Robert Olson

I guess, first of all to talk a little bit about the non-RV related stuff, we continue to work on that diligently. We’ve had a lot of things that we’ve analyzed. We had several things that we’ve opted not to get into. We have several things we’re working on right now, and obviously I can’t share them with you, because we don’t know where it is going to go, but we continue to look for ways that we can augment our RV production, and we’re getting closer on some things, so I’m hoping that, we’ll have something that will land, that will help us absorb some of this overhead that we’ve got right now.

As far as the travel trailers are concerned, I think for the last 8 or 9 months I’ve basically taken “no” out of my vocabulary, so to say that we would never get into travel trailers, I guess I’m not going to say that anymore. I know you and I have had several discussions that have been pretty emphatic that we would never get into travel trailers, but I’m not saying it would never be out of the realm of possibilities. We continue to look at that and what the best strategy would be if we would want to get into that, and that’s all the way from we Greenfield out here to acquisition to partnering with somebody, but we have nothing to announce at this time, but we are looking at that.

Craig Kennison - Robert W. Baird

Well thanks again. I know it’s a difficult time, but you guys are doing a very nice job of protecting the company. Thank you.

Operator

Your next question comes from Scott Stember - Sidoti & Company.

Scott Stember - Sidoti & Company

Sarah, could you give the ASPs for last year broken out?

Sarah Nielsen

AGAS 92223, A Diesel 171676, total A of 119434, Class C 63089, Class C 69,000 and total all end motor homes of 90,916.

Scott Stember - Sidoti & Company

Okay. And just getting back to the topic of taking share as some of your competitors are falling away by the wayside. You’ve had some new products that you came out with at the last show, the Via and the Adventurer Hybrid. Could you talk about maybe just how these are being received at the dealers? Have they gained enough traction that when the market comes back you could envision these things really taking off

Robert Olson

First of all, they’re not in production yet. We did introduce them at Louisville, for a couple of reasons, one is to show our dealerships that we are being innovative and coming out with a new product. That will be started here shortly in our 2010 line-up. We expect that those units will be available to the dealers probably some time late May, early June, and at that time, we’ll see how they stand on their own, but I can tell you that from the reception that we did receive at the show, I’ll probably start by saying that we did not openly take orders for the product there, that we got rave reviews, that it was the right product at the right time, especially on the Via and the RAO, and we’re expecting that it’s going to be one of those products that are going to give our dealer partners the incentive to want to buy something that has a chance of selling in today’s marketplace.

The Hybrid, again, we brought that out trying to show people that there are other options out there that we are being innovative, and when we introduce it with our 2010 product line-up, we’ll have a better idea if there are potential customers out there.

Scott Stember - Sidoti & Company

Just a follow-up on the environment with dealers right now, is it conceivable that from this point forward that as we look out 12 months with potential market share gains and failure with some of your competitors that your dealer count to actually be flat or actually slightly up from where it is now?

Sarah Nielsen

Well, I go back to what Bob had indicated earlier that geographically we have covered every key territory for the most part in Canada and the U.S., so the coverage has always been strong. There are certain dealers that may be attractive to add incrementally on a perspective basis, but we don’t have open gaping holes from a distribution standpoint. We’re really more approaching do we have the ability to have more shelf space.

We’ve already partnered with most of the largest dealers in every key market, so the near-term concern is how much inventory do they need to work through, and then what’s incrementally our opportunity to be a bigger player in regards to their offerings, so that’s, I think, what we would look to in the future, so I don’t necessarily expect the dealer count to jump up. You probably near-term are going to have more degradation for maybe some of the continuing small dealers, if they struggle financially and decide they just can’t continue.

Robert Olson

And I think along with that, Scott, is that once we get through this down turn, and we get through the product that has a potential of being distressed out there, I think the other question that’s unknown right now, is what size are these dealers going to come out of this and want be to be at? I think obviously we may have a smaller market for a while, until the general economy turns around, and it kind of goes back to Katherine’s question earlier, about turn rates and those types of things that if, in order to get the turns that I think they are going to be dictated that they need to get, I think you’re going to see some of the dealerships that are probably going to have to be just a little bit smaller in order to accomplish that.

Operator

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

Barry Vogel - Barry Vogel & Associates

First, Bob, I have a couple of questions for you. Could you look at that credit situation, which you have alluded to as being the most serious problem for you, right now, who are the main floor plan lenders to your dealer body?

Robert Olson

The two main ones are Bank of America and GE.

Barry Vogel - Barry Vogel & Associates

And what would you say a percentage they might account for your floor plan lending of your product, each of them?

Sarah Nielsen

Well, in aggregate, they’re probably 40% to 50% of our total flooring dollars.

Barry Vogel - Barry Vogel & Associates

Are there any other players that have any meaning, or do those guys dominate?

Sarah Nielsen

They are by far the largest and BOA is much larger than GE. We still do have an active portfolio that KeyBanc hasn’t walked away from, and that’s still less than GE’s size, but at the top end of the dollars of our dealer inventory, then it moves down into U.S. Bank, Wells Fargo, and then a lot of the regional kind of local choices that dealers choose to use, and that’s been an evolving dynamic, some of the rates that are being charged have been increased dramatically at the dealer level, and so they’re looking for options, but there’s not a lot of choice today in regards to where they can go, but the credit unions and some of the location lenders have been an attractive choice in certain situations.

Robert Olson

Yeah, I think they add to that, Barry, if you go back and look what RVIA has been doing here lately, they’re trying to work with the credit unions in fact, I think they’ve had some meetings with the National Credit Union Association in order to try to get a more active role in the financing side of our industry with credit unions.

Barry Vogel - Barry Vogel & Associates

So Bank of America is larger than GE?

Sarah Nielsen

Yes.

Barry Vogel - Barry Vogel & Associates

Okay. Now, is it true that in the last six or eight weeks of the year, GE basically stopped its floor plan lending and then resumed since the beginning of the New Year?

Robert Olson

Yeah, basically, if I recall, I think it was some time late or mid-November, all the way through probably all of January, it was more of a case where they put their lending on hold to evaluate where they wanted to go from there, and I think mid-to-late January, they kind of opened it up more on a dealer-by-dealer basis, and in some cases, on a manufacturer-by-manufacturer basis.

Barry Vogel - Barry Vogel & Associates

And did Bank of America do the same thing?

Robert Olson

No, they’ve been a player all the way through this.

Barry Vogel - Barry Vogel & Associates

Now, Sarah, can you tell me how many Winnebago dealers went into Chapter 11 in the first and second quarter of the year?

Sarah Nielsen

In the first quarter, I guess I don’t have it by dealer basis. I have, I guess, how many units we bought back in regards to the bank coming in and exercising their repurchase agreement, which doesn’t always necessarily mean that the dealer has filed for bankruptcy. It could be that they have defaulted on their payments, and the bank has come in prior to that, but if you look at the 25 dealers that we lost, in probably the 10 to 15 range of those dealers were due to financial distress, and we have other dealers that are literally chooses to close locations or get out of the motor home business, not predicated by a bankruptcy or imminent financial issue.

Barry Vogel - Barry Vogel & Associates

Okay. Could you tell us Bob and Sarah, because I know you’re looking at this very closely, and you had talked about the potential of some of the very large competitors filing, and unfortunately in the last two weeks basically two out of your three largest competitors, one was Monaco and the other was Leewood, both filed for Chapter 11, could you realistically tell us the effect that that’s likely going to have on your business given the size of these competitors over the next 12 months?

Robert Olson

Well, we’ve kind of touched on it before. I think what we’re going see is a large pool of motor homes that are going to be, candidates for discount. We saw it a little bit with some of the earlier, smaller manufacturers that went out of business. There was big concerns by the dealers, by the retail customers, from a market support standpoint, who is going to cover the warranty, what kind of a deal can I get on it, and I think we’re going to continue to see that, only on a larger scale. I think with the smaller ones going out first, I think it gave a lot of the dealers now some experience on how to handle some of these, and I think what you are going to see is a long-term or extended warranty packages bought. I think you’re going to see huge discounts. And like I said before, if you’re in the motor home buying market right now, you’re probably going to see some deals that you’ll never see again. And that will have an impact on us, there’s no doubt about it. I think it’s going to extend this downtime for everybody else that remains, and a lot of it is going to hinge on just how deep some of these discounts go.

Barry Vogel - Barry Vogel & Associates

What’s the largest that you’ve seen so far?

Robert Olson

We’ve heard more on a wholesale side of it, anywhere from 30% to 50%.

Barry Vogel - Barry Vogel & Associates

And that’s before Fleetwood and Monaco filed?

Robert Olson

Yes.

Barry Vogel - Barry Vogel & Associates

Do you think it’s fair to say, all things being equal, because it is very doubtful that you’re going to have any kind of strong V-shaped recovery in this economy, that this would extend the rest of the motor home business for at least 12 months, these two filings?

Robert Olson

I think from a manufacturer’s perspective, it’s going to extend, but I think from a retail standpoint, you might see an increase in business.

Barry Vogel - Barry Vogel & Associates

Now, Sarah, I was a little surprised and I just want to make sure I got this right, you said that the repurchases were only 18 units in the second quarter, and you resold 28 units. That seems pretty small. Is that correct in your presentation?

Sarah Nielsen

Yes, we bought back 18 units and resold 28.

Barry Vogel - Barry Vogel & Associates

And what was the total loss that you booked against your P&L in the quarter?

Sarah Nielsen

The total of revenue reduction which is a function of both the losses incurred and then an increase for the reserves was approximately $1.4 million.

Barry Vogel - Barry Vogel & Associates

Did that affect you negatively on your P&L by $1.4 million in the quarter?

Sarah Nielsen

Yes.

Barry Vogel - Barry Vogel & Associates

And what was it in the first quarter?

Sarah Nielsen

$1.7 million.

Barry Vogel - Barry Vogel & Associates

So that affected you by the tune of negative $3.1 million so far?

Sarah Nielsen

That’s correct.

Barry Vogel - Barry Vogel & Associates

And the reserve at $2.7 million, why hasn’t it been raised, given the new no losses?

Sarah Nielsen

It was raise by $1 million since our first quarter end.

Barry Vogel - Barry Vogel & Associates

That is still pretty small, don’t you think?

Sarah Nielsen

We have looked at our exposure on a dealer-by-dealer basis, based on their age of inventory, their turns, multitude of factors and laid that against the repurchase agreements in place to develop what we felt was a reasonable reserve. We’ve lost in aggregate in that $900 to $1 million so far this year.

We’ve have a decreasing amount of dealer inventory. As, you know, it’s down sequentially about 11% and 40% year-over-year, so the exposure in regards to what we’re calculating this reserve against, has been decreasing at a pretty fast rate, and we aren’t shipping a lot of new product when you see 315 units shipped in our second quarter to add back against that dealer inventory, so that mitigates it to some degree. We’re using the best information that we have to try to establish what the reserve should be at the end of each quarter.

Barry Vogel - Barry Vogel & Associates

And, Bob, is there any signs of a seasonal pickup, I mean your quarter extends through February as opposed to the other reports that came out a couple of weeks ago from [Thor], which only extends through January. Is there any sign of any seasonal pick up whatsoever?

Robert Olson

Yeah, I think so and I mentioned that before. We are seeing some retail pick up, but I think it’s probably more due to seasonality than it is to improvements in the economy. We’ve seen continued sequential improvement from November up through mid-March now, and each month it continues to get a little bit better. Barry, I want to go back to the other question that you asked prior to the repurchase, the impact that distressed product is going to have out there.

There’s two ways to look at it. I think retail is going to benefit from this. It could have a negative impact on the manufacturer, but with that being said, it depends on if the dealers, as they get through this distressed product still want to have shelf space, they’re going to start ordering it from the guys that are still around, so it could end up being more of a recovery for those guys still left standing than maybe what we even think.

Barry Vogel - Barry Vogel & Associates

Yeah, I understand that. There’s no question that long-term if you’re a floor plan lender or you are a retail customer, you want to make sure that the company you’re buying this or lending to, with you guys on the hook for the repurchase agreement, is going to be able to take care of their obligations.

Robert Olson

Exactly.

Barry Vogel - Barry Vogel & Associates

No question, but that’s long term. The first key is obviously survival. Now, as far as the wholesale pick up, have you seen any wholesale pick up?

Robert Olson

Not really. I think dealers are still reducing their inventories and the wholesale side of it, the order activity is still pretty slow.

Barry Vogel - Barry Vogel & Associates

So going back Sarah, going back to the P&L, notwithstanding additional cost cutting, is it logical, without any wholesale pick up, that you will continue to lose $16 million to $18 million operating loss quarter each quarter for the last two quarters?

Sarah Nielsen

One of the previous questions comment on our break-even point, which we moved a bit, but it is nowhere near the levels we’re shipping, it’s all a function of what we do shift. So, if we have sequential improvement in our third quarter, which seasonally, it should be stronger than our second quarter regardless of the environment we are in, that would reduce the operating loss that we are experiencing at this point.

Barry Vogel - Barry Vogel & Associates

Well, Bob is saying there’s no seasonal pick up wholesale yet.

Robert Olson

Yes, but we’re still a little early in that cycle, Barry. Usually, we start seeing a pick up in orders in April, when we’ve got our new product lines that are; the new model year that’s coming out.

Barry Vogel - Barry Vogel & Associates

Okay. So basically April will be the key to get any pick up seasonally wholesale?

Robert Olson

Yeah.

Barry Vogel - Barry Vogel & Associates

Thanks a lot. I think you’re going to survive. I mean, after all, Monaco and Fleetwood to fall, that’s quite significant.

Robert Olson

I think it goes back to what I said before, that I’ve been in this business a lot of years, and this is quite far the most difficult time I think we as an industry have seen.

Barry Vogel - Barry Vogel & Associates

You’re not the only one. You’re not the only industry.

Robert Olson

Absolutely, you are exactly right.

Operator

Your next question comes from Richard Cain – Unidentified Company.

Richard Cain – Unidentified Company

Most of my questions have been answered. But I do wonder on a couple of things. On your dealers, do you know how much in inventory they’re carrying of say, bankrupt companies; i.e. the Fleetwood and Monaco and maybe even go back to national RV, I’m talking about your dealers.

Sarah Nielsen

We are very aware of our dealers, what other product lines they carry, but having specific reporting on the level of inventory that they have on the other manufacturers, there’s public information available on the dealers’ websites that you can go to, but that’s the only way we would have visibility as to the magnitude from a unit basis, but we definitely understand especially from the recent announcements by two of our competitors, how many dealers we share.

Richard Cain – Unidentified Company

Am I wrong in my conclusion that the dealers that that you have, that you’re sharing with the bankrupt companies, that’s going to be a negative, because they’re going to push those units out as quickly and they are going to take these enormous discounts and they are going to push those out first. On a long-term basis it would be beneficial for you, because they’re going to replace it with Winnebago? Is that a fair conclusion, near-term it’s going to be bad, but somewhere out there, it’s going to be good?

Robert Olson

I think you’re right, and it’s going to depend on each dealer, because if you do have dealers out there that do have some product and as they discount and get rid of it, they’re going to be replacing that at an earlier rate, and so we should benefit from that. So it’s really hard to predict when we’re going to see the up tick from that. You break it into short-term and long-term, and to know exactly where that long-term is going to start, it could be relatively soon with some of the dealers that we’ve got.

Sarah Nielsen

But another risk that we’re obviously concerned in evaluating is the dealers that we share, what is the financial strength of those dealers, and will this be something that they can’t work through. Will they be a growing concern in the long-term, so there’s risk there to work through as this plays out.

Richard Cain – Unidentified Company

Talk about risk for a second. A lot of people have come back and looked at your contingent liabilities and your obligations to buyback this stuff, and I know you said you’ve increased the reserves, how do you in this economy, which gives you a lot of problems out there, how do you really feel about, is this reserve really adequate, or are we just playing it, hey, it’s got worse, so we’re going to add a little more reserves, but are we looking out say for a year and saying I’m really probably under-reserved? I mean, how do you approach that?

Sarah Nielsen

As I had mentioned in regards to a previous question, we analyze this on a dealer-by-dealer basis based on the inventory they have in place and the age of it, how quickly it’s turning. A number of credit score factors to establish what our exposure is under the agreements that we have in place.

So we very carefully look at what is out there and establish a reserve based on that, and we’re looking at what the current losses we have experienced in the last six months which are not something that we have any data and history to compare to, and assuming that we’re going to continue at these lost rates and escalating losses as, I have to move them and sell the units twice is how we construct and develop the reserves. So we think that what we have established is supportable, and based on the best information we have today.

Robert Olson

And I think I’ll add to that that if you look back a year, and many years before that, this was a non-issue, and I think your analogy was probably closer then than what it is now. It’s here is what we think, really not based on a lot of input, but I think this economy and then some restructuring and repurchase agreements, has forced us to look at this thing from the standpoint of we have to have specific data to look at, and as Sarah says, between dealer strength with credit scores, with aged inventory, the amount of inventory that they’ve got, we’ve laid out a really good formula from the standpoint of what we think our exposure would be. Now, some of that stuff is based on numbers that, we’ve put in there, what we think that they’re all defendable, and I think we’re better off forecasting what that reserve is today than we’ve ever been in the history of our corporation.

Richard Cain – Unidentified Company

Okay. On another subject, you have consistently said you weren’t interested in going into the RV market, now just to play comparion for a second. Aren’t you going into a much more competitive market, and why pick now to go into the travel trailer market?

Robert Olson

Okay. As I assumed you meant travel trailers. Well, first of all, I need to clarify; I didn’t say we were going into it.

Richard Cain – Unidentified Company

Well, you implied that you’re going into it. It is a reversal, right? You’ve always said that we’re a motor home manufacturer; we’re not a travel trailer manufacturer.

Robert Olson

And I will tell you all we are doing is studying it right now; there is nothing in the lurch to get into it. All I am saying is that we’ve taken “no” out of our vocabulary and we are going to look at every potential in order to put our people back to work.

Richard Cain – Unidentified Company

So it’s really almost, like, “hey, you’re going to put unutilized capacity to work, and why not go into something somewhat of an affiliate manufacturing?”

Robert Olson

Yes. And as one of the other callers asked, about non-RV related type things, we’re looking at those just as well. So depending on what comes to fruition first is going to depend on what we have for announcements later.

I guess I just want to make sure that we don’t give the wrong impression that we are actually getting into the total business, we are not. We are keeping all options opened and the point I make is that we are not unequivocally saying no.

Richard Cain – Unidentified Company

Okay. Well, it is a change and we’ll take it at that.

Operator

Okay. At this time, I would now like to turn the call back over to Bob Olson for closing remarks.

Robert Olson

Thank you. While the current market remains extremely challenging we continue to be optimistic about the long-term outlook for the RV industry. The RV lifestyle is a great American tradition that won’t be abandoned by RV enthusiasts. Customers who have delayed their motor home purchase due to the economic environment will be ready to buy when the credit markets and general economy turns around, and when that happens, we’ll be ready and in a great position to take advantage of it.

I would like to thank everyone for joining Winnebago’s Industries Conference Call today, and look forward to talking to you again in June when we report our results for the third quarter of fiscal 2009.

Operator

Ladies and gentlemen, this concludes the presentation. You may now disconnect, thank you, and have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Winnebago Industries, Inc. F2Q09 (Qtr End 02/28/09) Earnings Call Transcript
This Transcript
All Transcripts