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Winnebago Industries Inc. (NYSE:WGO)

F4Q09 Earnings Call

October 15, 2009; 10:00 am ET

Executives

Bob Olson - Chairman, Chief Executive Officer and President

Sarah Nielsen - Chief Financial Officer and Vice President

Sheila Davis - Manager of Investor Relations, Public Relations

Analysts

Kathryn Thompson - Thompson Research

Alvin Concepcion - Citigroup

Scott Stember - Sidoti & Co

Anand - Avondale Partners

Craig Kennison - Robert W. Baird

Barry Vogel - Barry Vogel & Associates

Richard Keim - Kensington Management

Operator

Good day ladies and gentlemen and welcome to the Winnebago Industries fourth quarter fiscal 2009 results conference call. My name is Heather, and I’ll be your coordinator for today. At this time all participants are in listen-only mode. We’ll be facilitating a question and answer session towards the end of today’s conference. (Operator Instructions).

We will now turn the presentation over to your host for today’s conference, Sheila Davis, Public Relations and Investor Relations Manager, please proceed.

Sheila Davis

Good morning, and welcome to the Winnebago Industries Incorporated conference call. To review the company’s results for the fourth quarter fiscal year 2009 ended August 29, 2009. Conducting 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 received a copy of the news release with our earnings results this morning. This call is being broadcasted live on our website at www.winnebagoind.com. A replay of the call will be available on our website at approximately 12:00 PM Central Time today.

If you have any questions about assessing any of this information, please call our investor relations department at 641-585-6803 following the conference call. Before we start, it’s my responsibility to inform you this presentation may contain certain forward-looking statements within the meeting of the Private Securities Litigation 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 Olsen, Bob.

Bob Olsen

Thank you Sheila. Good morning and welcome to Winnebago Industries fourth quarter conference call. Sarah will go into the results for our fourth quarter and fiscal year 2009 shortly, but it is evident from our financials that fiscal 2009 was one of the most challenging years in our history as a corporation.

We have worked very hard this year in light of some extremely difficult economic conditions to reduce expenses, while successfully launching a very exciting 2010 product line-up. We have focused on managing our balance sheet to take all the necessary steps to maintain adequate liquidity and preserve our ability to make investments in products and processes important to our long-term growth and profitability.

As an industry, we have been in one of the most severe downturns over the last 18 months that we’ve ever seen. We are hopeful that we are at or near the bottom of this downward cycle and that the worst may be over. The general economy is looking healthier with improved consumer confidence, stable fuel prices, low interest rates and an improved equity market.

Along with these economic improvements, our product line-up for 2010 is being very well received by our dealers as well as retail customers.

Unlike many of our competitors who seem to have chosen to simply warm up last year’s models, this is a lineup that has been revamped with new floor plans, exciting new interior and exterior decors and a new offering such as the Winnebago Via and Itasca Reyo as well as the new Winnebago Tour and Itasca Ellipse 42-foot tag axle. Winnebago Industry’s commitment to providing our dealers with industry leading products continues to be evident.

The excitement over our 2010 products has also been evident in recent shows, particularly at the Pennsylvania Camping and Travel Show in Hershey. At the Hershey show, we were pleased to see acceptance of our products in nearly every product category. As mentioned earlier, we feel we are at or near the bottom of this downward cycle and that the worse maybe over. One of the indicators of this is that the replenishment cycle maybe starting.

We make this statement based on our sales order backlog on August 29, 2009, of 940 units or $86.6 million, which has grown by a 146% on a unit basis and a 158% on a dollar basis compared to what we reported at the end of the third fiscal quarter. It has continued to grow since the end of the fiscal year.

We are also pleased that we continue to gain market share, results from the calendar year-to-date through August 2009 we reported earlier this week to ensure market share growth for Winnebago Industries in the combined class A and class C market, as well as substantial improvement on our Class A Diesel market.

Combined market share results for calendar 2009 year-to-date through August were 19.1% compared to 18.5% for the same period last year. Our Class A Diesel market share was 10.8% compared to 7.6% for the same period last year.

While improving somewhat credit continues to be challenging at both the wholesale and retail level. Floor plan lenders continue to monitor dealer inventories very closely with an emphasis on the aging of inventory and the number of times a dealer is able to turn their inventory each year.

Wholesale lenders have helped manage dealers’ inventories so closely it has resulted in historically low levels of Winnebago Industry’s products on our dealer volumes. Judging from our sales order backlog, however, we believe dealer inventory was also bottoming out (inaudible) we are confident that we’ll increase dealer inventories in fiscal 2010.

With a terrific 2010 product lineup, increased market share, a growing backlog of orders and extremely low levels of inventory currently available to retail customers, we are optimistic about continuing to grow our market share as the year progresses.

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

Sarah Nielsen

Thank you Bob. I will now review the financial performance for the company’s fourth quarter of fiscal year 2009. Revenues for the fourth quarter were $59.5 million, a 30.3% decrease as compared to the fourth quarter of fiscal 2008. This is primarily a result of a decrease in our motor home deliveries of 323 units or 34.8%.

Industry wholesale shipments as reported by RBAA were down 36.7% for the same period. Our average selling price increased 4.3% as compared to the same quarter last year due to an increase in Class AB summit, which is partially offset by an increase in product incentives offered at the wholesale levels.

In regards to cost of goods sold as a result of significant inventory reduction, which resulted in liquidation of Last In First Out inventory values, we recorded a benefit of $2.8 million in the quarter to reduce our LIFO reserve. Aside from this positive non-cash item the quarter was negatively impacted by lower motor home deliveries and corresponding lower absorption of fixed cost. Higher production inefficiencies due to these lower volume an increased wholesale and retail promotions as compared to the prior year.

SG&A expenses were nearly $2 million less than last year of the same quarter; this was due to reduced legal and professional fees, reduced severance cost and lower wage related expenses due to the reduced headcount as compared to last year.

We recorded a non-cash charge of $855,000 to reflect the impairments of the asset value over our Hampton Fiberglass facility. As announced in June we are closing that facility to further reduce our fixed cost structure and have listed the building for sale during the quarter. A portion of the production have been back moved back to Forest City this past month and a portion was outsourced. We also listed the Charles City manufacturing facility for sale during the quarter.

From a task perspective, the fourth quarter included significant activity. We established a full evaluation allowance against all of our deferred tax assets in accordance with applicable accounting rules. Under these rules, our recent cumulative losses are a significant negative factor. Our losses combined with uncertain near term market and economic conditions reduced our ability to rely at any future taxable income projections.

Thus, we concluded that a full evaluation allowance should now be established. This evaluation allowance was a non-cash charge and thus had no impact on our cash flow. The economic benefit of these future tax deductions has not been lost and when we return to profitability a tax reduction will be taken and the associated tax benefits will be recorded.

We do have a $17.4 million tax refund receivable related to losses incurred in 2009, which we expect to receive in our second quarter of fiscal 2010. We ended the fiscal year with $36.6 million in cash. We also classified a $13.5 million, a portion of our auctionary securities a short term, which we have borrowed $9.1 million. We expect to receive the remaining $4.4 million in our fourth fiscal quarter of 2010 due to the UBS settlement.

We saw further reduction in inventories during the quarter of $6.4 million, this was due to $9 million reduction in raw materials primarily, chassis utilization and a $4.6 million reduction in finished good inventory, which was partially upset by increase in our work in process inventories and a decrease in our LIFO reserves.

In regards to repurchases there was minimal activity during the fourth quarter. We bought back 13 units, resold 14 and realized a net loss of less than 20,000. This is encouraging as the first three quarters were quite challenging in this area. Our dealer location count also remained constant since May.

Our repurchase reserve decreased during the quarter due to the continued decrease in our contingent liabilities as a result of the decline in dealer inventory levels, which dropped 27.1% from 2,324 units at the end of the third quarter to 1,694 at the end of the fiscal year.

Lastly, we did terminate our existing credit facility and entered into a new credit facility this week. This new facility provides increased flexibility with the three-year term and the ability to borrow up to $12.5 million with our financial covenant restructuring if there is adequate asset coverage.

We also have the option to increase the facility size up to 50 million subject to certain provision. Its potential borrowing capacity maybe beneficial if we need to increase our inventory levels rapidly.

I will now turn the call over to the operator for the question-and-answer portion of our call.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Kathryn Thompson - Thompson Research.

Kathryn Thompson - Thompson Research

First I wanted to focus on your backlog. You mentioned in your prepared comments that you’ve seen an improving trends in backlog since the August fiscal year end. Could you give a little bit more color in terms of the types of units, and the pace of the improvement in overall backlog, and how that compares to kind of your previous periods of going from the summer into the fall?

Bob Olson

Well, I think we are pretty pleased with what we are seeing for orders coming in right now. I think the mix is fairly strong, it’s kind of spread evenly across the board. Comparing to previous periods, I think historically this industry looks at going into the fall and winters is our weaker periods of time.

I can say that we are seeing an increase in orders that maybe a little bit higher than what we would normally see. We’ve seen recoveries before where we have had to do some extra things in the typically slower parts of the year that we are hoping that we are going to see maybe something similar this time, but it’s going to be better than what the typical fall and winter season will be.

Sarah Nielsen

Kathryn, this is Sarah. I think part of what we are seeing too is maybe that inflection point where the dealer inventory levels on the field are just at that low point, where it’s not sustainable and that’s a function of our order increase in our view, and also just a function too of having exciting new products that increase some momentum out there. So these are very good things after such a long protracted downturn.

Kathryn Thompson - Thompson Research

I would assume that in terms of -- is this just more dealer restocking or is this driven by consumer demand. I would assume there would be some consumer demand based on requirements in the Hershey Show?

Bob Olson

I think part of it is consumer demand, but I really think that we are at a point now with this dealer inventories going down so low over the course of the last 18 to 24 months. I think maybe we are finally seeing the bottom of where the dealers are looking at holding their inventory levels.

So, I think there are a couple of things. I think you do have some increased retail activity, but I think you have got a bigger issue here with two other things, one is the dealers are looking at it and saying, I am finally at a point now that I am turning my inventory and I can’t afford to restock and the lending institutions are going to give me the floor planning wherewithal to do that.

But I think a big issue of that is what we have come out with for 2010 product lineup. We are just hearing very good reports on acceptance for that 2010 product, which we may know all secretes about that. We have spent a lot R&D researches and have changed the product pretty substantially this year, in anticipation that we were getting close to the bottom and this would give that extra incentive for the dealers and hopefully the retail customer to look for something new.

Kathryn Thompson - Thompson Research

Okay. One thing you noted in your press release and we had also heard from the field, you are starting to see some positive trends with Diesels. When did you start seeing positive trends with Diesel sales?

Bob Olson

Well, I think part of it you can say was at the end of our fiscal 2009, when we were getting, trying to get rid of our 2009 product. So we could open up spots for 2010 and I’ll openly admit that part of that is from discounting that, we offered some good deals on that, end of the year stuff.

But I think from our 2010 standpoint, once we started bringing our dealer console in, our sales District Managers and started getting our 2010 product out into dealers lots, the acceptance of that product has been just phenomenal and, we are starting to see some of the benefits of all efforts that we put towards our 2010 product.

Kathryn Thompson - Thompson Research

And before my next question, just to be clear on the backlog. My understanding is you really started to see more of a pickup towards the latter part of the quarter, and it’s really that momentum is carrying into September and October. Is that a correct assessment?

Bob Olson

That’s a fair statement. We started seeing some of this in late July and then it picked up momentum in August, and it just continued through, so far into the first quarter.

Kathryn Thompson - Thompson Research

Would you be able to give some color on current capacity utilization?

Bob Olson

For the fourth quarter, we ran utilization rate at about 22%. So, we still got long ways to go.

Kathryn Thompson - Thompson Research

But was it a sequential improvement for --

Bob Olson

Yeah, last quarter we were around about 18% range.

Kathryn Thompson - Thompson Research

Looking forward and thinking about how you plan going into Louisville and then also for your December just your seasonal shutdown, is it too early to have some type of speculation about how much time you anticipate taking off for your seasonal shutdown. How much time was taken off last year just to put some perspective on those numbers?

Sarah Nielsen

Well, may be one thing, I would first answer on that topic is we have adjusted our line rates so significantly in the downturn that the norm kind of went out of the window, and then you are well aware that we took two mandatory weeks down from a salary standpoint during fiscal 2009, one of which was in July and one was over the January timeframe last year. Our really workforce had been living through that much more dramatically all throughout.

So, there was the typical time shutdown a year ago during the holiday season, but we had a lot of shortened workweeks, alternating lines all sorts of ways to manage and only produce to demand.

Bob Olson

Yeah, and that’s really a tough question to answer from the standpoint of comparisons. I agree with Sarah that it wasn’t the norm last year. To give you an idea on that, we were jus talking yesterday about the fact that, how long has it been since we have run all three lines at the same time and it was August of ‘08. That’s how long this thing; it's been in the downward cycle.

Kathryn Thompson - Thompson Research

Are you running all three lines now?

Bob Olson

Yes we are. In fact this week is the first week that we have had all three running at the same time, which is really a nice feeling.

Kathryn Thompson - Thompson Research

So you potentially could see may be one or two weeks off in December versus much longer, which was happening last year.

Bob Olson

We hope it’s going to be much shorter than it was last year.

Operator

Your next question comes from Alvin Concepcion - Citigroup.

Alvin Concepcion – Citigroup

This is actually Alvin Concepcion for Greg. Just wanted to ask about retail sales trends, have they changed much in September and October from August?

Bob Olson

They’ve come up a little bit, but, since the first of the year, they’ve been hanging in there around that 18000, 18500 annualized for an industry on the motorized.

Alvin Concepcion – Citigroup

On the new products among your ten, how are the margins compared to last year’s line up?

Sarah Nielsen

From a margin standpoint, if you just look on a variable margin perspective, the climate in 2009 fiscal year was challenging throughout because of the incentives offered, both at the retail level, at the dealer level, basically across the board.

So, it wasn’t the pricing of the product itself, it was what was done after the fact. On a perspective basis, first and foremost we have to have the volume here in our factory to support the fixed overhead side of the equation, which has been a drag on us for six quarters to improve our margin picture. If that is there then you are going to see the improvement across the board for us from a margin perspective.

Alvin Concepcion – Citigroup

Would you be able to give an update on what you are seeing in the wholesale and retail credit side, I mean how is the trend in the last two months. Also, given the improving trends in RV industry, I mean what are the prospects like for a major vendor like Bank of America to increase their presence?

Sarah Nielsen

Well, from a wholesale and financing, I’ll touch upon that first, I think that it’s been a long year in regards to living through where we were starting actually October of ‘08 to now. People understand what the rules are, they are very different than where we used to be and a lot of dealers have worked their inventory positions down fairly dramatically, that’s evidenced in some of the numbers that we report.

So, a lot of dealers have improved their turns and their areas or positions and are in a healthier spot, not all dealers and I think that the rules that both, in the major two lenders on a wholesale side are following are understood, but I think at least from that standpoint, there’s not a freezer and an interruption it’s going to be based on the specific metrics of a dealer and where they are at.

From a retail side, I think that it’s still a pretty tight buy-back, but if you have the right qualifications, you are going to be able to find the financing both on wholesale and retail. The rates aren’t necessarily that bad. It’s more, what obligations you might have procurement wise and how aged the product might be could be the bigger challenge because that’s not all the way corrected. But at least we had a period of time where it’s been fairly consistent approach to the market place. I guess some overall comments I will provide.

Bob Olson

Yes, I guess just add to that, I think a lot of it depends on a dealer-by-dealer basis. You’ve got some dealers out there that are in pretty good shape right now and they are not having by any of the troubles getting following from some of the national chains.

On the retail side, I think a lot of our dealers are starting to learn to ask the right questions; this is going to be the new norm that they have to have qualified buyers and then it's just not going to go through. We are kind of getting back to our roots, which I think is good for this industry. We have talked to both DOA and to GE and both of them are committed to this industry and both have intentions on trying to grow their presence on it.

Operator

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

Scott Stember - Sidoti & Co

Sarah, do you have the ASPs byproduct line for this year and last year?

Sarah Nielsen

Yes, I do. From a Class A gas standpoint, our average for the quarter was 82,669 that was just compared to 85,038 last year. On the Class A Diesel side, the ASP was 159,274 as compared to 172,035, but overall A did increase, it was 119,859 as compared to 107,467.

From a classy standpoint, our ASP was 67,051 as compared to 67,125, ANC in total 89,982 as compared to 85,655 and then Class B 62,020 as compared to 69,438 to give a total ASP for the quarter 87,671 versus 84,047.

Scott Stember - Sidoti & Co

Can you just talk about the backlog a little bit? You have had two major competitors that’s been out of the markets for a while, it appears that they will probably going to start up operations relatively shortly again. If you can may be touched on what impacts, positive impact that have in your backlog this quarter or at the end of this quarter, and how that possibly turn the other way a little bit if, once they get up and running.

Bob Olson

Well there is always that possibility. I think, we were still in as an industry, dealers are trying to reduce their inventories and there is still some dealers out there that are still challenged with that. I think between dealers looking at it and saying I want to align myself with a manufacturer that is currently producing, and as a good presence in this industry. I think we probably did gain a little bit from that, but I will still go back that, we have aligned ourselves over the years with what we feel are some of the strongest dealers out there.

If they have ordered our product, if they happened to carry one of these other competitors lines, if they have ordered our product versus that I think that reinforces the fact that they are trying to align themselves with somebody stronger.

Now with that being said, I think there was a little bit of benefits from us, or for us getting some of maybe that shelf space, but I think when you look at what we are introducing for new product in 2010, I’d probably expect that’s going to continue until, at least some of these other manufactures really get their feet under them and come out with the product line that they know what they are going to offer.

Scott Stember - Sidoti & Co

Going back to capacity utilization, I think Kathryn had asked also about where it is as we stand right now. At the current run rates could you basically talk about what you are seeing from the capacity of utilization standpoint, and maybe also touch on what we need once again to turn to profitability?

Bob Olson

Well, I think the big issue is volume obviously and we are very pleased with what we are seeing of the current backlog, but there again we have got a pretty big horse here that takes a lot of hay to feed, and we need to get additional orders in here so we can start running all three lines at a much higher volume.

As I mentioned when Kathryn was on the phone, this is the first week that we have had all three lines running consecutively, and that at least that is the start. As dealers continue to replenish their very-very low inventories, we think that we are going to see more of those or hopefully we can bring that volume up. Along with that, as the economy starts to improve, there ought to be a tendency of retail activity improving as well.

You look at 18, 185000 or 500 that the industry has been running here from an annualized rate, and you go back in the history and that is exceptionally low. So if we can start seeing some improvement in that retail activity as well, that’s just going to pump this volume for all of the manufactures in this industry, and as we feel that we have got a pretty strong product line up for 2010 we are hoping that as the industry expands and maybe we can get a little bigger piece of that action as well.

Scott Stember - Sidoti & Co

So, I guess what I’m trying to get at, is that at the levels that you are running at right now, you are saying that you still need more to happen in order for you guys to turn the stone towards profitability.

Bob Olson

Yes, we do.

Scott Stember - Sidoti & Co

As far as new products go, most of the stuff you have introduced earlier this year, is there anything new coming down the pipe just anecdotally from Louisville?

Bob Olson

There might be a couple of new floor plans, those types of things but nothing major. If there was, I probably couldn’t tell you anyway.

Scott Stember - Sidoti & Co

Last question, I think Sarah in the past you said 14 to 16 printed units for the quarter is breakeven, and I know there is some variability with discounting in the market. What you are seeing now, are we still in that 1400 to 1600 quarterly rates?

Sarah Nielsen

That question comes up each quarter. In regards to what we think is of a breakeven unit amounted to look at, there is some other variables, you definitely hit it appropriately in regards to what are we doing on the top line.

Another area that we maybe haven’t talked much about on a historical basis is there is a portion of our revenue stream that comes from other areas outside of the core motor home sales, and back in the earlier profitable years here when you even look at 2007 and 2008; the level of that revenue base in regards to where it migrated here in 2009 is another element of the variability to what our breakeven wound be or what our unit would be.

So the one thing I guess I would add to the unit quantification is, if we see the levels of the non-motor home revenue base, which would be what we identify as parts and services and some of the other manufactured products we make. If that stay that the lows we’ve seen in 2009, we are going to need a little bit higher of a run rate from a motor home standpoint to make up for those revenue stream.

So if you are going to look at a quantification, 1700 to 1900 units would be a fair characterization, as opposed to 14 to 16. Now if we see a recovery that’s more significant on the non-motor home revenue side, then that can help and push the units of run rate down a bit, but there is a lot of difference of variables to consider in that equation and so it’s never going to be a simple answer unfortunately.

Scott Stember - Sidoti & Co

All right, and to that point the non-motor home demand right now; have you seen any uptick in that?

Sarah Nielsen

Well, part of it is a function of what’s happening with billet. A portion of our motor home revenues is aluminum extrusion, and a lot of our customers there have been suffering in this economic down turn saying that we are. You look back at 2007 and we had over $50 million of non-motor home revenues, and 2009 it’s going to be just slightly above 30. So 2010, it’s hard to predict where we are going to see that move.

Some of it is going to be correlative to the unit volume because it’s parts and services types of a business, and then there’s some that’s completely independent and are not going to venture a forecast on that front, but it would be a function of what the general economy does to some degree and I leave it at that.

Bob Olson

Just to talk a little bit about the aluminum extrusion, I think it’s going to be tied very significantly to the economy. So if that starts to pick up, I think we’ve got some opportunities, but we’ve got some fairly big customers that are in the automotive industry, remodeling, windows, doors those types of things.

So a lot of categories, lot of commodities that are tied to the general economy. So, if we start seeing an improvement in the overall economy, I think we’ll start seeing an improvement in that business as well, but only time is going to tell.

Operator

Your next question comes from Brett Jordan - Avondale Partners.

Anand - Avondale Partners

This is Anand for Brett. My question is basically turning to inventories. Just wondering how much further you think that you can lower the inventories in the upcoming quarter.

Sarah Nielsen

I think that what was accomplished in 2009 is not something that we expect to repeat itself on a prospective basis. Our finished goods inventory level; we basically had it from where we ended at the end of fiscal 2008. We’ve really reduced work in process, which as we migrate production levels up we are going to actually see work in process increase, and from a raw material standpoint, that would be a positive too if we are moving those inventory positions back up to support production.

So, if there is a recovery in our shipments and in the business, I think we are going to need at least this much inventory or more on a perspective basis versus further reducing these levels.

Anand - Avondale Partners

Then, the only other question I have is, basically can you give us a feel from a contingent liability number?

Sarah Nielsen

In regards to where we ended the fiscal year, we are in the mid $90 million range, and if you look at where we were at the end of the third quarter, it was approximately $120 million. So it’s down in a 20% range.

Operator

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

Craig Kennison - Robert W. Baird

I would just say that first of all I do agree with you Bob that inventory seems to have bottomed in the channel and it’s just great news for everybody.

Bob Olson

It’s been a long time coming.

Craig Kennison - Robert W. Baird

I hear you, and it is great news though and I am happy to hear it. Let me ask you this. Sarah, I just wanted to confirm; I think in the past, may be my notes are off, but you had said break-even at more or like 1,200 to 1,400 units per quarter. Am I mistaken on that?

Sarah Nielsen

That’s number’s in the transcript from the third quarter call.

Craig Kennison - Robert W. Baird

12 to 14 was in the transcript?

Sarah Nielsen

Yes.

Craig Kennison - Robert W. Baird

Okay, but you are saying now because of the loss of some ancillary revenues, it’s more or like 1,700 to 1,900 units?

Sarah Nielsen

Yes, and when I was talking in past quarters, we had always caveated. If we were assuming a normal mix and a normal level of discounting and promotional activity, and I am looking in the rear view mirror to our true results in the 2006 and 2007 timeframes, and that was where our break-even was.

With all that we’ve done in regards to cost reduction and the changes we’ve made in relation to fixed costs, our goal is to make sure we could maintain that kind of break-even, but when we have such significant declines in the 40% level of some of the non-motor home types of revenues and then some of the other increases in the costs that we’re mitigating against, such as increases in [Inaudible], increases in our average wage from a normal standpoint with the downsizing that’s happened in the last 18 months, the mix of our employees at a higher hourly rates, healthcare, etc.

There’s a lot of things that have mitigated against the cost reductions we’ve made and I think it’s probably the best in relation to talking about where we are in a prospective basis to be more conservative and I would assume that it’s going to repeat the times of almost seven at this juncture.

Craig Kennison - Robert W. Baird

Well that’s helpful, I appreciate it, but just to put this in the context for myself here, you just concluded a year in which the industry probably saw its worst year in my memory, probably most of your memories, but you have shipped 2,200 units and what you are saying in terms of break-even, as you would have to more than tripled that to get to the 1,700 number that you are talking about, is that the right way to think about it?

Sarah Nielsen

Yes, I think that’s fair as to how significant it could be. I mean, you’re right. We’ve never seen a year like this, to have an industry that maybe will ship wholesale wise 11,000 units, and the worst year before that was in the Mid 20s. It’s a big pool that we have to climb out of, that’s very true.

Craig Kennison - Robert W. Baird

And just to follow-up on that; with a backlog of 58%, obviously an incredibly strong backlog, but is that going to be enough to give you the momentum I guess to approach that, you think in your fiscal 2010.

Sarah Nielsen

That’s our goal.

Craig Kennison - Robert W. Baird

For fiscal 2010?

Sarah Nielsen

We are looking. Our history in regards to providing forecast and that we are not going to attempt it and all we can do is to manage the reality that we are living today, and if it needs to involve further cost reductions, because the volume isn’t going to support the structure we have, we are going to continue to do so, but if the business is recovering and we have the opportunity to accomplish it that way, that’s obviously our preference.

We think liquidity wise, we are in a very good situation for 2010, but we’ve taken great effort to do that, and the reduction that we’ve accomplished in the inventory, I can’t repeat, and so we either have to have the business internally to sustain ourselves or we are going to have to cut our fixed cost structure further.

Craig Kennison - Robert W. Baird

And I’m sorry to press the point, but I just don’t want to put words in your mouth. You are not saying that your goal is to ship three times as many units in 2010 as you did in 2009.

Sarah Nielsen

No, our goal is to be profitable, as soon as possible and I’m not trying to tell you the time frame in which we think that’s possible, but the fixed quarters we’ve lived through here, in business environment that we’ve been in, have been very, very painful and to pull Bob across the table for me. We have been surviving, but we need to move our focus from surviving to succeeding or to be profitable and not accept this on a continued basis.

Bob Olson

Yes, I think one of the things, just to echo that, what we’ve talked about here, especially in recent weeks, is that we’ve got to change our mindset from survivability to profitability, and that’s always been at the forefront. I think all of you guys that have followed this corporation know that profitability is very important to us, and that hasn’t changed. It’s just that we’ve been thrown quite a set of cards and we’ve had to play with that deck.

I’ll echo what Sarah said, the profitability goal has never changed and as we go forward, we are hopeful that we will see the volume, that with the cut that we’ve made will get us to the goal of profitability, but if it hasn’t we’ll have to take additional actions, and to sit here and try to figure out what the size of this industry is going to be, is very difficult.

In fact we just had a meeting last night with our key management group and one of the things that we talked about there was the fact that we were walking a very fine line. We don’t want to be too conservative, because if we’re too conservative, we are going to leave orders on the table, because dealers aren’t going to put up with extremely long lead times, and they’ll go to somebody else to place their orders.

But we can’t get too aggressive, because if this is a mirage and that’s sustainable, then we’ve just took all that cash that we’ve worked so hard to get and turn it back into inventories and none of us want that. So it’s a very fine line that we walk, and we look at all of the different variables every single day, to make sure that we continue to make the right decisions.

Craig Kennison - Robert W. Baird

Well thanks, and I would say, I think you guys have done just a masterful job of surviving in this really difficult environment, when a lot of your competitors couldn’t. I just wonder, I mean if orders aren’t going to triple and you are not announcing material cost cuts today, it’s hard for me to see what type of outlook you would have to have or when you would like to see profitability, let alone kind of a dollar or more in earnings power.

Operator

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

Barry Vogel - Barry Vogel & Associates

I first have a question for Sarah. Can you give us your estimate of capital expenditures and depreciation and amortization this year?

Sarah Nielsen

For 2010?

Barry Vogel - Barry Vogel & Associates

Yes.

Sarah Nielsen

We are looking at spending $2 million this next year, and depreciation is going to be in the $6.5 million range.

Barry Vogel - Barry Vogel & Associates

And as far as those plans that are for sale, are you having any nibbles? In other words, do you think it’s probable that you might sell some of these facilities?

Sarah Nielsen

Yes, I do think it’s probable.

Barry Vogel - Barry Vogel & Associates

Okay, and as far as the cost reductions, if things continue the way they are right now, are you currently planning any further cost reductions or are you satisfied that you are really down to a very low level of operating costs?

Bob Olson

Right now, I think we are happy with where we are at, especially with what we have seen in the last few weeks from order activity. But as we’ve said, with Craig it’s going to be dependent on where this thing goes in the next few months. Our goal continues to be profitability and if we can get it with the volume that looks like could be coming at us, that’s great, if not we are going to have to make some adjustments.

Barry Vogel - Barry Vogel & Associates

Now, as far as color on those two major competitors that went into Chapter 11, but Bob do you know if they are actually producing motor homes right now?

Bob Olson

I don’t know that for a fact, but I have heard that they are in a very limited quantity.

Barry Vogel - Barry Vogel & Associates

And are they shipping motor homes into the market place?

Bob Olson

As far as I know, in limited quantities.

Barry Vogel - Barry Vogel & Associates

Okay. So they are in there, those two brands are in the statistics.

Bob Olson

Yes.

Barry Vogel - Barry Vogel & Associates

As far as wholesales shipments in the industry, do you know about their discounting right now, you probably do, what they are doing to try to get rid of inventories.

Bob Olson

I really can’t answer that Barry. I think there maybe some going on, but I think going forward, you may see that starting to diminish. I think the real issue is what’s on the dealer’s laps today and the two new companies coming out of the ashes really don’t have anything to do with that.

Barry Vogel - Barry Vogel & Associates

And is this still a significant amount of inventory on the dealer lots from those two competitors?

Bob Olson

We don’t have visibility of that. We have to make some assumptions. There is plenty. I think the bigger issue there is the age of the product, than it is the actual quantity, because overall, you look at this industry dealer inventory and is at historical levels.

Operator

Your next question comes from Katherine Thompson - Thompson Research Group.

Katherine Thompson - Thompson Research Group

I just want to follow-up; do you have an estimation of what your total cost cuts are from the peak of the market when you started cutting 18 to 24 months ago, to today. Keeping in mind that you have sold few facilities, you have cut your headcount, what is the overall cost cuts from a percentage basis by your estimation?

Sarah Nielson

I guess one thing I want to correct, there haven’t been any facility sold, we have two for sale.

Katherine Thompson - Thompson Research Group

I understood that, but your new productions from those two idle facilities to their main campus.

Sarah Nielson

What I guess I had at hand or I can easily answer that is, from ‘08 to ‘09 we’ve seen about a $24 million reduction, that’s including SG&A. So if you want to talk about specific facilities, we saw a benefit from a Charles City standpoint in 2009 of approximately $1.5 million, but we did have to spend some to ready that facility for sale.

We think that Hampton, on a perspective basis, once that facility is full, we will equate to $700,000 to $800,000 of incremental savings, and that’s just getting finalized as we speak. So between those two facilities on an annualized basis, perceptively you are probably talking about $3 million.

But other cost cutting events that have happened, so much has been through headcount reductions across the board, and then also it’s a function of things that we did in ‘09 that are not necessarily sustainable if we need the people to be producing products such as our mandatory weeks off, but not everything that has occurred is permanent in nature, but those are some of the steps I can provide you from off the top of my head.

Katherine Thompson - Thompson Research Group

So basically you are implying that you haven’t even seen the full benefit from your plant closures in ‘09, and it’s really into the current fiscal year that you’ll start seeing the full benefit of that.

Sarah Nielson

Oh yes. Hampton, I know it’s in June and the production just started on last month in September here in Forest City, and we do have those facilities for sale and those have to be sold to eliminate the property taxes and some of the maintenance kinds of cost associated with that, but yes, some of that is still in the works.

Katherine Thompson - Thompson Research Group

So, it seems that you seem to be a little bit influx in determining what your total cost cuts are, and so you really get some volume flowing through. So it seems to me to be a little challenging to be able to pinpoint exactly what a unit basis is in terms of a breakeven, is that logic off?

Sarah Nielsen

No, that logic is not off.

Katherine Thompson - Thompson Research Group

So I think it might be a little hasty to say, “Well, it was 1200 to 1400 units, and now it’s 1700.” I mean I think the reality is, it maybe somewhere in between and more skewed towards the bottom, particularly if you have a significant increase in production at your main facility.

Sarah Nielsen

Yes. The dialogs we’ve had in the past is once you provide a range it’s always brought up again, and I have rather be conservative rather than not, but it’s a very, very difficult exercise to say exactly what it is, because you have to plan.

There are so many different variables that enter into that equation, and first and foremost we are interested in increasing the production schedule, support the demand and get that product out into the field, take on additional shelf space and we have some great opportunities here in the Diesel side, with what’s happened in the industry in the last particular six to eight months with some of the two late major players in that space. So yes, there is a lot in the mix right now, and that’s fair Katherine as to how you are describing on the quantification of what we have stated.

Katherine Thompson - Thompson Research Group

And at the end of the day, volume is the most important metrics, and that to some extent is driven by your backlogs, correct?

Sarah Nielsen

That’s correct.

Operator

Your next question comes from Richard Keim - Kensington Management.

Richard Keim - Kensington Management

Most of my questions have been answered, but a quick question; with regard to Barry’s question, isn’t it true that these -- I would have to term them new competitors about the bankrupt companies are really just starting to get into the market and are really, they are just dribbling in, is that fair or do you think they are in full production?

Bob Olson

No, I think that’s a fair assessment. It’s going to take them a while to get their feet under themselves. I mean, you’ve got to look at renewing all of your licenses, you got to look at renewing your dealer base, you’ve got to look at your supplier base and that all takes time. I can’t tell you what they are producing from a volume standpoint, other than what’s discovered in the industry that they are producing, but it’s at fairly low volumes right now.

Richard Keim - Kensington Management

Right, right. Well I guess just following up then, it seems to me that probably your market shares really have been picked up from those people who went out of business, as opposed to majors in the business today that are still there. Would that be a fair assumption?

Bob Olson

Well, we’ve increased market share there is no doubt about that. I don’t want to give the false impression that we are gaining market share in leaps and bounds, because you can’t lose sight of the fact that most competitors had quite a bit of product out on the dealers lots.

Until that blows through, you are still going to be dealing with them. Because I think if you look at the market share reports, you are going to find that frequent to my workbook, we are doing pretty good from a market share standpoint, considering that they have been out of business for several months.

Richard Keim - Kensington Management

If I carried this, thinking through, would it be erroneous for me to consider the fact that maybe your market share will even go down as production starts, from new companies that we are talking about?

Bob Olson

Well, we are going have more players that we have to deal with, and if that assumption can be made, we are hoping that with what we are trying to do with our dealer base and our new products and things like that, that it will mitigate those new people coming back in.

Richard Keim - Kensington Management

Shifting for a moment into your finances. Now if I understand correct, you have increased your known capacity, is that correct?

Sarah Nielsen

We have a new agreements in place that allows us own through an accordion feature to move the line up to $50 million, but it’s secured by assets, and primarily inventory and receivables and we have to have that adequate assets coverage to be able to accomplish that. So the size of it today is not increased, but we have the ability to, if it’s needed on perspective basis?

Richard Keim - Kensington Management

Okay. So the size has increased but not today’s borrowing. Carrying that through, is one of the reasons you did that, anticipating that maybe you would need more money as effective. Now you are looking at 1700 or 1900 units as a breakeven, and it’s pretty well assured that you are not going to make money in the current year of 2010. So maybe you increased it because it’s certainly moving forward.

Sarah Nielsen

The change in the facility in regards to what we had is the fact that the prior facility we had didn’t provide us the flexibility. This allows us to borrow with no financial covenant restrictions up to $12.5 million, and then have that additional element of expanding it when needed. So it was more to have a facility that would provide the increased flexibility we thought we’d need over a longer term. So it was a decision made in that light.

Richard Keim - Kensington Management

I’m sorry, I didn’t get your last statement.

Sarah Nielsen

It was a decision made in light of an increased flexibility the facility would offer us in regards to having access to borrow with no financial covenant restrictions, which was not the case in our previous facility.

Operator

As there are no further questions in queue at this time, I’d like to turn the call back over to Bob Olsen for closing remarks.

Bob Olson

Thank you. While we continue to be challenged by current additions, we are pleased to see more positive momentum in the market place and we are optimistic about the long-term outlook for the RV industry. Customers who have delayed their motor home purchase due to the depressed economic environment will soon be ready to buy when the credit market loosens up and the general economy gains momentum.

I believe our 2010 products are the right products for the current market place, and as the leading motor home manufacturer in the industry, we are ready and able to take advantage of the recovery. I would look to thank everyone for joining Winnebago Industry’s conference call today, and I look forward to talking with you again in December, when we report our first quarter of fiscal 2010 results. Thank you.

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. F4Q09 (Qtr End 08/29/09) Earnings Call Transcript
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