Coachmen Industries Inc.. (NASDAQ:COA)
Q4 2007 Conference Call
January 29, 2008, 10 a.m. ET
Richard M. Lavers –Chief Executive Officer
Colleen A. Zohl - Chief Financial Officer
Michael R. Terlep, Jr. - President of the RV Group
Rick Bedell - President of Housing Group
Todd Woelfer - General Counsel
Jeff Tryka - Director of Planning and Investor Relations
Robert Rodriguez - First Pacific Advisors
Barry Vogel - Barry Vogel & Associates.
John Diffendal - BB&T Capital Markets
Good day, and welcome to the Coachmen Industries, Inc. conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Director of Planning and Investor Relations, Mr. Jeff Tryka. Please go ahead, sir.
Thank you and welcome to this Coachmen conference call to review the company's results for the fourth quarter and full year ended December 31st, 2007, which were released yesterday afternoon. Before we start, let me offer the cautionary note that comments made during this conference call that are not historical facts including those regarding future growth, corporate performance or products or forward-looking statements within the context of the Private Securities Litigation Reform Act of 1995. Many factors could cause actual results to differ materially from those expressed in the forward-looking statement. Information on the risks that could affect Coachmen’s results may be found in the company's recent filings with the SEC. Comments made today represent management’s views on January 29, 2008, and these views may change based on subsequent events and the risk factors detailed in the company's core public filings. Although these comments may be available for a period of time through the company's website, the company undertakes no obligation to update these comments during that period.
With that stated, I will turn the call over to Rick Lavers, our President and Chief Executive Officer.
Thank you Jeff and welcome everyone. With us today are Colleen A. Zohl, our Chief Financial Officer, Mike Terlep, President of the RV group, Rick Bedell, President of our Housing Group and Todd Woelfer, our General Counsel.
Last Friday, I glanced at my Forbe’s Success Calendar on my desk and the quote for the day was from Edward Ziegler, “It is a good rule to face difficulties at the time they arise and not allow them to increase unacknowledged.” As well as being one of the management principles, I have tried to inculcate in this company to confront realities and solve them rather than try to sweep things under the rug.
That quote seemed a very apt call in the circumstances. It is m y distinctly unpleasant duty today to report very disappointing bottom-line results for the fourth quarter. This should come as no real surprise to anybody who has been paying attention to the numbers that were turned in for the first three quarters and the collapse of the markets in both of our business segments and who recognizes that the fourth quarter is traditionally our most difficult; however, we are especially disappointed in this performance because of the improvements, which we have scored in the third quarter.
With the impact of the spread of the sub-prime mortgage crisis, the quarter did not begin well on October and deteriorated further in November. December was nothing short of a train wreck with RV dealers increasingly concerned about the prospects of a recession and with the housing market flat on it’s back. Media talking heads were in a frenzy to be the first to announce that the U.S. economy is in recession and helped create a self-fulfilling prophecy by instilling near panic among consumers, small businesses, and individual investors, despite low interest rates and low unemployment. I am quite certain that substantially contributed to a precipitous drop in the consumer confidence index. That index now stands at 88.6 - a drop of almost 25 points since July, and that was before January’s stock market gyrations. This has had a predictable and inevitable depressing effect on the market for high cost discretionary consumer durables.
Our quarter’s results were also affected by delays in the (inaudible) of military barracks project that were entirely outside our control. While we commenced building modules for that project in December as planned, as a result of onsite delays, revenues for the modules built in 2007 cannot be recognized as income until 2008. Further, due to gathering storm clouds from the credit markets, we deemed it prudent to increase reserves in several areas, which also affected our bottom-line performance numbers. Colleen will provide you more detail.
Nonetheless, I am acutely aware that this kind of result simply cannot continue. Well, it is an understatement that I am displeased. I am not despondent, not at all. I said that the second half of 2007 would be better than the first half and despite all of these problems, that prediction was correct, just barely subtle at the bottom line, but very much so operationally. As a result of the restructuring we undertook, the redirection of the company we launched, the new products we introduced and the cost reductions we made, we expect to make a profit in 2008, even if our markets do not fully rebound.
Last call we went into some detail as to why our stock price sorely undervalues our realizable assets. In this call, we tend to emphasize why in stark contrast in 2007, we expect to be profitable in 2008. We have kept you advised of the many steps undertaken in 2007 to reduce our cost of operations such as strategic sourcing, planned consolidations and product simplification and cautioned you that the savings would not all drop to the bottom line until 2008. We should now start reaping a full measure of those efforts.
Thank you Rick. As mentioned in our release yesterday, the weakness in both of our industry segments continued in the fourth quarter with a significant adverse impact on our financial results. While our pre-tax loss from continuing operations for 2007 was worse than 2006, if you strip out the gains on asset sales and other positive items impacting the results of operation for 2006 and the negative items impacting the results of operations for 2007, given a 33% reduction in revenues in the fourth quarter, our results actually indicate operating performance improvement.
For the fourth quarter of 2007, sales fell 33.5% to $77 million versus $115.8 million last year. Consolidated growth margin was negative 3.2% compared to negative 0.2% for the same period a year ago. The deterioration in growth margin is directly attributable to the decline in sales volumes in the quarter.
Selling, general, and administrative expenses were reduced by $1.3 million compared to the fourth quarter of 2006, due primarily to reduced selling expenses as result of lower sales commissions associated with the reduced revenue level. Pre-tax loss was $14.6 million for the fourth quarter versus an $11.6 million pre-tax loss for the fourth quarter of 2006. At the bottom line, the net loss from continuing operations for the quarter was $13.8 million or $0.87 per share in 2007 compared with a net loss of $31.4 million or $2.01 per share in the year ago quarter.
However, the loss in the fourth quarter of 2006 included a non-cash charge of $24.4 million to establish a valuational allowance for the full value of the company's deferred tax assets. The fourth quarter results include a number of non-standard items. We realized gains on the sale of assets of $400,000 in the current quarter compared to gains of $2.3 million for the fourth quarter of 2006. The incurred expense was totaling $200,000 leading to the closure of the Ohio housing plant, primarily for an inventory movement to Indiana, inventory reserve and severance costs.
We incurred expenses of $100,000 and additional capital investments of $700,000 relating to the move of the RV Group’s paint facility back on to the main Middlebury's production complex. We also incurred incremental legal fees in connection with our efforts to recover certain damages and recorded increased reserve for sales and new tax issues, inventory, and other reserve arising from the current economic environment totaling $1.7 million. Excluding these items from the 2007 and 2006 pre-tax loss from continuing operation, our results would have been a loss for 2007 of $13.1 million compared to a loss of $14 million for 2006 on 33.5% fewer sales.
Turning to our results for the full year, sales fell 14.8% to $480.8 million versus $564.4 million in 2006. Consolidated growth margin was 2.7% compared to 3.6% for 2006. Despite a significant decrease in revenues, we were able to mitigate the decrease in gross profit levels due, in large part to the cost reduction efforts achieved primarily in the second half of 2007 as we have discussed previously. Selling, general, and administrative expenses increased by $4.4 million to $49 million; however, SG&A expenses in 2006 were reduced by the impact of legal recoveries in the amount of $3.6 million, which did not occur in 2007. Combined, these factors resulted in a pre-tax loss of $40.5 million for 2007 versus $16.7 million pre-tax loss reported in 2006.
At the bottom-line, the net loss from continuing operations for the year was $38.8 million or $2.46 per share in 2007, compared with a net loss of $33.2 million or $2.12 per share in 2006. Within the full-year result, the company incurred a number of non-standard items that impacted our results. We realized gains on the sale of assets of $1 million in the current year compared to gains of $8.7 million in 2006. While in 2006, we received a legal recovery of $3.6 million. In 2007, we incurred incremental legal costs in our efforts to recover damages from various losses incurred in prior years, expenses associated with the plant consolidation and restructuring, sales and new tax reserves, additional reserves related to the current economic environment, and consulting fees associated with our strategic sourcing efforts, which combined to reduce profitability by approximately $4 million.
We also incurred the non-cash legal goodwill impairment charge of $3.9 million in 2007. Excluding these items from 2007 and 2006, pre-tax loss from continuing operations, our results would have been a loss for 2007 of $33.7 million compared to a loss of $29 million for 2006 on 14.8% lower sales. For the 12 months ending December 31st, 2007, net cash flow from operations with an outflow was $7.9 million compared with an outflow of $5 million from operations in 2006. We held a tight line on capital expenditures throughout the year, spending only $3.6 million in 2007, $700,000 of which related to the move of our paint facility in the fourth quarter versus $4.6 million expenditure in 2006.
On the balance sheet, cash decreased from a year ago by $1.1 million to $1.5 million at December 31st, 2007. Total inventories decreased by $4.2 million from the end of 2006 to $79.3 million. Finished goods inventory increased by $800,000 from $44.2 million to $45 million with a $1.8 million increase in housing finished goods offset by a $1 million reduction in finished goods at the RV group. This increase in finished goods was planned with a buildup of inventory associated with Fort Carson project. Shipments of the Fort Carson inventory began in January 2008, and unlike 2006, the RV Finished Goods inventory is not open inventory. Rather the majority of this inventory is committed to specific dealers.
This is a very positive difference from last year. Long-term debt has decreased 22% during the year and stands at a very low $3 million as of December 31st, 2007. Short-term borrowing increased during the end of last year by $10.8 million to $20.1 million as of December 31st, 2007, and shareholder equity stands at $121.1 million resulting in a book value per share of $7.67.
As I discussed in detail in our last conference call, Coachmen has adequate liquidity and access to cash to carry us through these current difficult market circumstances. Despite the increase in short-term borrowing, we have adequate availability under our long-term credit agreement, which does not expire until 2011. In addition, we expect additional cash inflows in 2008 resulting from a number of recently completed and pending actions.
First, we have completed the sublease for a significant portion of our service center in Chino, California, and we began receiving cash inflows from that action in January 2008. During the fourth quarter, we completed the sale of the former CLI paint facility for $2.9 million consisting in cash of $300,000 and a one-year secured note of $2.6 million. Based on the equitable accounting rules, this sale resulted in a pre-tax gain of $400,000 on the equipment and a deferred gain of $1.1 million on the property.
This deferred gain will be realized in 2008 upon the receipt of the cash. We also have a number of other properties in various stages of being sold including a vacant production facility indicator in Indiana. The final pieces of our former Georgie Boy Production facilities in Edwardsburg, Michigan, vacant land in Tennessee, and the Ohio housing plant, which was closed in the fourth quarter.
In addition, we are in the process of moving our corporate headquarters from Elkhart to the Middlbury RV complex, after which our former headquarters building will be available for sale. Combined reflective properties will generate proceeds of approximately $10 million. In addition, we are now realizing many of the operational improvements from the actions taken in 2007, which will further enhance cash availability. Mike and Rick will further expand on these improvements in their remarks.
In summary, during the quarter we managed our assets and cash flows and we continued to maintain control over inventory levels in the face of particularly difficult market conditions for both business segments. We saw the results of our efforts at reducing operating costs, which mitigated our losses despite the significant drop in revenues.
We have a number of idle assets which will be sold to increase our cash availability and our plant consolidations and restructuring efforts are now largely completed, which puts us in a position to achieve our ultimate goals at the bottom line in 2008. Now, for details regarding our RV segment I’ll turn the call over to Mike Terlep, President of the RV Group. Mike?
Thank you Colleen and good morning. The recreational vehicle group generated sales of $54.5 billion during the fourth quarter, down 34.5% from $83.3 million last year. Gross profit from the fourth quarter was negative $2.7 million. Although unacceptable, the negative $2.7 million in gross profit in the fourth quarter of 2007 compares favorably to the $2.9 million gross profit loss in the further quarter of 2006, especially in light of 34.5% lower sales in 2007.
Total operating expenses were reduced by 10.7% to $6.8 million from $7.6 million last year. As a percent of sales, operating expenses were flat despite the sharp decline in sales. Although the RV Group booked a pre-tax loss of $9.4 million, this compares favorably to the pre-tax loss of $10.4 million in the fourth quarter of 2006, an 8.9% pre-tax improvement on 34.5% lower revenues. For the full year, the RV Group sales fell 10.6% to $361.7 million compared to $404.7 million last year. The detailed market information by product categories regarding the industry as well as for the RV Group is as follows.
Overall unit shipments for the industry were down 9.5% for the calendar year. Through the industry, all our total product categories were down at wholesale by 11%. Travel trailers were down 11.5%, fifth wheels were down 8.2%, and camping trailers were down 15.3%. For the industry, Class A’s and Class B’s were down 1.1% with Class A’s relatively flat and Class C’s down 4%.
Coachmen wholesale unit shipments outpaced the industry for the year in Class C’s, fifth wheels, and camping trailers, while we lagged behind the industry in Class A’s and travel trailers. At retail, industry numbers are available only through November of 2007. Here to date, towables retail registrations for the industry are up 1.4%, with travel trailers up 6%, fifth wheels down 4.3%, and camping trailers down 9.8%. Here to date, retail registrations through November total motorized products for the industry are down 5.5%. The diesel Class A is down 5.1%, gas Class A is down 7.8%, and Class C is down 4.2%.
Our retail market share, as recorded by Statistical Surveys, Inc., through November of 2007 has improved in Class C motor homes up 15.7%. Our retail market share has improved in travel trailers up 23.1% and our retail market share has improved in fifth wheels up 3.2%. Our retail market shares are down by 20% Class A's and 5.8% in camping trailers.
Gross profit for the year decreased slightly to a small loss of $0.1million versus a slight gross profit of $0.3 million in 2006, on 10.6% lower revenues. RV operating expenses increased to $33.8 million from $25.7 million last year; however, this was primarily due to the impact of several non-recurring items specifically, in 2006, we had a legal recovery of approximately $3.6 million, which served to reduce operating expenses by approximately $3.6 million.
In addition, in 2007, we had a goodwill impairment of $3.9 million in consulting fees associated with our strategic sourcing efforts of about $0.8 million, all which served to inflate operating expenses by another $4.7 million.
RV Group pre-tax loss increased to $33.9 million for the full year compared to a loss of $25.4 million one year ago. After adjusting to the prior-mentioned $8.3 million of non-recurring items adversely affecting the '07 to '06 comparison, the pre-tax tax performance was relatively flat on 10.6% lower sales. This is reflective of the operating improvements accomplished in 2007.
The RV Group total finished goods now stands at $34 million, which is a reduction of $1 million from one year ago. As Colleen mentioned earlier, one key improvement in finished goods from one year ago is that most of our current finished goods is to satisfy dealer over-orders as opposed to being billed as open inventory.
Although the bottom line does not yet show the results we want and need, we have accomplished meaningful gains and margin improvement, increased capacity utilization as a result of consolidation activities, and overhead reductions from the cost cutting that we diligently managed throughout 2007. The road to return the RV Group to profitability requires significant improvement in margins through better products, strategic sourcing, improved quality, and higher capacity utilization of our operating facilities.
So where are we on these key ingredients? Better products at better margins. Despite the sales weaknesses we experienced in the fourth quarter, based on the favorable response to our new models introduced at the Louisville show and our current backlogs and sales activity, we are optimistic that our sales will rebound in the first quarter, and in fact January results are proving this out.
Several of our new models featured and enthusiastically received at the Louisville show are just now starting to roll off our production line with the balance of these new models to be produced throughout the first quarter. In addition, we are now starting to see a positive influence from (inaudible) incentive programs we launched to simulate the retail market and assist our dealers; more on this later.
Our new product offerings captured four of the twelve must-see products identified out of over a thousand units on display at the Louisville show. Our new products ranged from an all new and innovative front kitchen [virtuoso] product offering to an all new and very creative entry level Class A style and fore plan in our pursuit in our other product line. To all new touring Class C built on the Daimler Chrysler spreader chassis called the Prism, to a total redesign and step out of the leprechaun Class C, to innovative new fore plans in our fifth wheel product lines, and a re-engineered Spirit of America entry level travel trailer line that is now fully laminated with an aluminium cage construction providing high line features and a reduced weight all at an entry level price point.
And of course we continued to step out with our adrenaline sports utility trailer product which was up in shipments by 426% in 2007 versus 2006. Because of the acceptance of our new products offerings the margins on our new 2008 and 2009 product offerings continues to improve and are now in line with industry standards or benchmarks. Our strategic sourcing team has done a stellar job. Largely contributing to our improved margins are the pay-backs from our strategic sourcing efforts. We've been successful in reducing our SKU's by 29% through standardization and accomplishing supplier consolidation of 29%, both of which assist us in managing our spend much more efficiently.
Despite inflationary pressures and certain key components and materials, we've been successful in generating meaningful material cost reductions over the last 6 months and we'll carry forward throughout 2008. The quality of our product is radically improved and now leads the industry. Our quality in metrics reflects an improvement of 31% for the year since the implementation of our new quality program.
This, along with the tighter controls around our warranty administration, has resulted in steadily reduced warranty expense over the last year. Total warranty expense in 2007 was $15.5 million compared to $19.1 million in 2006.
More impressive is that total warranty expense in the second 6 months of 2007 was $5.5 million compared to $10 million in the first 6 months of 2007. As the percent of sales, our warranty dropped each consecutive quarter throughout 2007. Q1 was 5.1%, Q2 was 4.2%, Q3 was 3.9%, and Q4 was 3.6%.
Finally, one of the key drivers to our operating losses has been the unfavorable operating leverage due to sales and production volumes. To address this, we communicated during last quarter's conference call that we were in the process of executing a large scale consolidation of our assembly and support plants, consolidating all Class A production into one plant and all travel trailer production for our Indiana facilities into one plant.
In addition, we consolidated two of our support plants on our North Middlebury complex to our primary Middlebury complex and moved our paint operation from Elkhart to Middlebury.
The Elkhart paint facility has been sold and we have significantly downsized our West Coast service center and subleased the 65,000 sq. ft. plant we were operating service from. These actions have improved our overall capacity utilization to approximately 70% from the prior utilization of less than 50%. We are pleased to report that our consolidation action plan has been fully executed and we are tracking ahead of plan in overall cost savings of $7 million annually.
In 2007, we successfully reduced our break-even from over three quarters of $1 billion to approximately $350 million. Of course, in order to accomplish X profit, we must generate reasonable sales volumes. To do so, we've chosen retail market stimulation rather than wholesale discounting. While retail incentives may take a month or two longer to realize wholesale improvement, it avoids long-term product evaluation.
An example is the attractive retail finance rate program we rolled out to our dealers featuring reduced retail fixed term rates to assist dealers from replacing aged inventory with fresh inventory and provide products through the supply chain.
In addition to our operational accomplishments, we have launched an aggressive marketing program to leverage our brand equity. This program is focused on growing our distribution base by offering an enhanced value package for our dealers. And we have reinvented our owners’ club in order to leverage our customer base and attract more prospective customers to our family of products.
While our 2007 bottom-line results were disappointing, we have taken serious, decisive, and necessary action to return our company to profitability. In our last call, I said that the RV ship has turned. In 2008, we will show you. Now for details about housing segment, I’ll the call over to Rick Bedell, President of our Housing Group. Rick?
Thank you Mike and good morning everyone. In 2007, the Housing Group faced the weakest market conditions in more than 25 years. For the fourth quarter, according to the U.S. Census Bureau in December, total single family housing starts fell 36% from a year ago. Our housing sales fell 30.9% to $22.5 million from $32.5 million last year. Our housing gross profit fell to $0.2 million from $2.6 million in 2006. As a result of the lower operating leverage resulting from the lower revenue levels and due to the ramp up of our Iowa and Colorado plants for the Fort Carson project and the low utilization of the Ohio facility, which was closed in December.
Housing SG&A expenses were essentially flat at $4.3 million versus $4.2 million in 2006. Housing pre-tax loss was $5.2 million for the fourth quarter of 2007. All of these results were impacted in part by the daily of Fort Carson for which we incurred expenses in 2007, but will not recognize revenues until 2008.
For the full year, again according to the U.S. Census Bureau for the full year, total single family housing starts fell 28.6%. Our housing sales fell 25.4% to $119.2 million from $159.7 million last year. Housing gross profit decreased to $12.8 million versus $19.9 million in 2006, while gross margin percentage decreased to 10.8% from 12.5% over the same period. This was primarily due to suboptimal utilization of all of our plants, but in particular Ohio, which was consolidated into the Indiana facility.
Housing SG&A expenses increased to $16.3 million from $15.8 million last year. As a result of a lower gross profit and higher operating expenses, the Housing Group incurred a pre-tax loss of $7.4 million compared with a pre-tax profit of $2.7 million a year ago.
As I previously stated, we in the midst of the worst market conditions in memory and we are faced with the choice of waiting for the market to improve, which is no option at all, or taking the steps necessary to ensure the success of our Housing Group regardless of the market. We are taking steps to do just that.
Our strategic sourcing efforts will save over $1 million at 2007 purchasing levels. Increasing our volume will only increase the incremental savings. We have streamlined our product offerings from nearly 300 floor plants to just over 90, making it easier for our customers to choose their new home design and will reduce the costs associated with maintaining the additional plants.
We have revised our specifications and pricing strategies in order to remain competitive and increase our margins also allowing our builders to up-sell on specification upgrades. The consolidation of our Ohio and Indiana facilities, along with increased capacity utilization at our other facilities, is expected to contribute nearly $5 million to the bottom-line over 2007.
Our major projects and military construction efforts continue to grow and will again be positive contributors to our profits. Let me provide some detail on our efforts on major projects and military construction. Although we expected to begin delivery of the Fort Carson barracks buildings in December, due to delays on the project site, we were unable to do so. We began delivering modules in January and we will have approximately 120 units in the staging areas by the end of the month. We are planning on continuing delivery of modules at the rate of approximately 150 units per month through the month of May. This will significantly boost the Housing Group's results for the first and second quarters.
We continue to pursue military opportunities with our partners, The Warrior Group and Hensel Phelps, and we expect to make proposals in 2008 for over $100 million in contracts. We are still delivering homes to the Gulf Coast region and our major project sales group is working on several projects now that the Katrina Rebuilding Effort is finally gaining momentum.
Driven by consumer interest and high energy costs, the housing industry is at long last beginning to recognize the crying need for energy efficiency and the use of sustainable materials in the construction of new homes. We've taken a leadership position in this market transformation and next month we are launching our green catalog. This will enable our customers to choose for themselves what technologies and earth-friendly materials they would like included in their new homes within their old budget. One example is Icynene insulation.
During the last half of 2007, Coachmen and Icynene jointly developed a new injection technique that greatly reduces the labor involved in applying foam insulation. We believe that this new system will also increase the structural rigidity of our homes. Because this was a joint effort, this technology is exclusive and proprietary to the Housing Group within our market areas.
In addition, we are very excited about the construction of the Smart Home Green Plus Wired Exhibit for the museum of science and industry in Chicago. We are working on this project with Michelle Kaufmann Designs, a full-service design build architectural firm that specializes in sustainable, innovative, high quality, modular architecture. The firm's founder, Michelle Kaufmann, works under the belief that sustainable, well-designed buildings should be accessible to more people and she has simplified the process and chosen offsite modular technology as the means to create beautiful, Eco-friendly homes and buildings.
Our goals are to make it easier for people to build green and live a more sustainable lifestyle. The home, called the mkSolaire, will be prominently located on the grounds of the museum. The museum itself attracts over 1 million visitors per year. This entire endeavor should put modular construction in a new light for the general public and fits well with our commitment to sustainable construction.
During the fourth quarter of 2007, we began testing the first component of our new marketing program with good results. Based on those results during the first quarter of 2008, we will expand the program to several of our markets. The program will include billboard, television, and print media advertising. This has never been attempted by the Housing Group and we will proceed with all due caution, as we make the public aware of our capabilities and the benefits of purchasing a state-of-the-art home from Coachmen's Housing Group.
Part of our new marketing campaign is directed at attracting new top quality builders to our organization. Although our current builder network is second to none, we still have areas within our marketing reach that are underserved. Because the independent builders are such a vital product of our past and future success, it is crucial that we continually add new and highly qualified builders to fill the gaps in our market areas.
In summary, 2007 marked the most difficult year for the Housing Group in memory. The single family housing market in the United States showed its worst performance in the last quarter century and in our market areas this marked the second, and in some cases, the third consecutive year of market decline. Despite these difficult markets, the Housing Group has made the important decisions and taken the appropriate actions to mitigate these broad market conditions and get back on the path with profitable growth.
Let me now turn the call back over to Rick Lavers, Rick?
Thank you Colleen, Mike, and Rick. We have accomplished many, many things in 2008. First and foremost, we have changed our business model to maximize manufacturing flexibility, to reduce our material costs through SKU reductions, strategic sourcing, and use of standardized parts from a smaller number of key vendor partners to minimize inventory to the extent possible, building to order rather than building open inventory, we exploited our brand equity, we priced our product to the market. We conceived innovative and styled products with an advanced design team under a strict new product development process, and all with an overriding emphasis on quality.
We have drastically reduced our voluntary hourly turnover which contributes to improved plan efficiencies and fewer errors online. We are beginning to reap the benefits now in terms of increased quality by increased customer satisfaction and dramatically lower warranty costs.
Specific to the housing side, we have created new green and wired product options and earlier this month, as Rick detailed, announced that we will build the Michelle Kaufmann Design house for display on the grounds of the Museum of Science and Industry in Chicago.
We managed our balance sheet closely monitoring payables and receivables, limited capital expenditures without starving research and development, marshaled underutilized assets and reduced head count, as we continue to seek out more ways to reduce costs where we can. For example, this month we began the relocation of our corporate offices from Elkhart to our manufacturing complex in Middlebury. As we no longer have any manufacturing operations in Elkhart or Edwardsburg, Elkhart offices really no longer make sense.
This relocation will reduce our costs and use empty office space at the complex, eliminate the time inefficiencies of many daily 45-minute one-way trips by executives and managers between Elkhart and Middlebury. We will increase senior management interactions by having all of our senior RV housing and corporate offices housed in one location, and perhaps most importantly, we will place the corporate officers in the middle and where the action is, closer to the manufacturing operations that are at the heart of our business, in fact on our major RV manufacturing complex.
While I obviously cannot be satisfied in any way, shape, or form with the results of the fourth quarter or for 2007, at the same time, I am very proud of this management team and of our employees for everything that we have accomplished in 2007. Unfortunately, while we relentlessly drove up costs throughout 2007, at times it seemed that no matter how fast we improved our quality, how fast we reduced our costs, or how fast we increased our market share, the RV and the housing markets fell faster and further. But we now believe we have built a solid floor under the business throughout 2007, we recalculated and restructured the company.
Now is the time to put all the changes we made in 2007 into action and we fully intend to do just that. Change was the key word for 2007. Execution is the key word for 2008. We are committed to being profitable whatever it takes. Based on what we have done in the internal metrics we are tracking even in the face of the challenging markets of both of our business segments, I am confident in saying that 2008 will better than 2007 and not just marginally better, tremendously better. Right now, January sales are proven to be much better than December’s.
Behind the scenes during 2007, we have been diligently putting together several significant new initiatives that we are on the cusp of announcing, which are just not quite ready for prime time. These initiatives will bring additional revenue streams to the company. If we can successfully implement those initiatives and if we can continue the trends we have established of growing RV market share and increasing our military and major projects housing business, we can actually add top line growth in 2008 even in these deplorable market conditions. The key word is execution.
Before we go to questions, I would like to take a quick moment for a word for our employees, builders and dealers; some of them often listen to these calls. I know that many of you are concerned about your jobs and your businesses and the future of our company. With the closure of national RV and Travel Supreme, many of our local RV competitors are operating on 3-days weeks and the consolidation of our Ohio plant into Indiana as well as on our own RV facilities and all the talk about credit crises, real estate bubbles, and possible recession, as well as our own losses, frankly only a moron will not be concerned. I am sure rumors are rampant and I have heard some doozies over the last year. But this too will pass. This morning, I bought gas for $2.58 per gallon. Can you believe that? Last week, the FED dropped the FED funds rate by three-quarter points Congress and the White House are actually working together to pass a massive economic stimulus package on a fast track. Can you believe that?
We detailed last fall, why we have the capital resources to ride out the slump and Colleen provided further assurances this morning. As to our future, you know better than anyone how our products have improved in quality, but also features, design, and pricing. You know better than anyone all the many, many changes we have made in this company over the last 12 to 15 months, including personnel changes; look around you. You will recognize the strongest team we have had in years and that is no accident. You also know better than anyone how hard this management team is working. I promise you, we will continue to sweat blood to keep those production lines full and the key products moving off your lots and out of your shoulders, because when you succeed, we all succeed.
The Colorado and Iowa plants are full with military housing products we didn’t even make two years ago. Indiana will be healthy with the addition of work transferred from Ohio plus backstopping Iowa and Colorado and building another brand new product, the Michelle Kaufmann House at the Museum of Science and Industry, as well as fulfilling the needs of its own builder base.
Several of us will be traveling to The Carolinas and to the Gulf Coast next week trying to nail down some major project opportunities for our south-eastern plants. I'm not saying that our RV business is robust, but we are building five days a week and actually stepping up production rates in Middlebury for our new 2008 and 2009 models of C’s, A’s, and travel trailers in order to meet backlogs that extend into March.
SUT sales from our Georgies division are up over 420% from a year ago and Viking is developing a brand new product to supplement the camper trailer line.
Thank you for all your hard work. This team, top to bottom is now all pulling together in the same direction and we can do it. All pulling together in the same direction, we can do it. We are doing it and we will do it. We are going to be okay.
Operator, we will now be glad to entertain any questions.
Thank you. (Operator Instructions). We'll take our first question from Robert Rodriguez with First Pacific Advisors.
Good morning Dick.
Unidentified Company Representative
How are you Bob?
Fine thank you. I just wanted to say congratulations to you for executing an extremely difficult transition here. It is a breath of fresh air to see the costs that you've been attacking as well as the consolidations and the elimination of excesses so.
Unidentified Company Representative
Bob, from all this management team, given the results we turned in this year, you have no idea of what that comment means to us. Thank you.
You are welcome. But I'm curious about the RV Group's cost containment, reductions and everything. When you adjust look, they look materially better. But in the case of the housing, obviously there are some costs in there that were not in the press release such as the incremental cost from the delays at Fort Carson plant shifts, because if I adjust for the elements that were publicly disclosed, it looks like the operating costs were about 5.3 versus 5.2 on Q4, and for the year at 20.2 versus 19.6 for the year-end operating cost. So I know I'm missing something in there and if you could help clarify that to better demonstrate what the adjusted cost might be.
Well Bob, this is Rick Bedell. There are a couple of things in operation there. First of all, low utilization of some of the plants as well as the lack of the planned revenue that we had coming out of Colorado and Iowa relative to the Fort Carson project. I don't want to talk specifically about what kind of revenue numbers we're talking about, but it's fairly significant.
Can you give us an idea of let's say what the cost impact might have been?
The cost impact is probably in the range of 20% to 30%.
20% to 30%. I was looking for in terms of a dollar number; 20% to 30% exactly of what?
20% to 30% of revenue which would have been somewhere in the vicinity of about $200,000 to $300,000 at the bottom line or at the gross profit line.
GP line; and what was the utilization rate there in your operations?
Well, for Iowa and Colorado, the utilization rate for the plants was close to…
No, I meant for the entire group?
For the entire group? Probably 50%.
Unidentified Company Representative
That was for the year?
For the year.
For the year. Okay and the Q4?
Q4, probably closer to 60%.
60% and the cost of plant shifts?
That was a charge of $200,000 for the Ohio consolidation.
So basically the incremental cost would have been about, it looks like about $400,000 to $500,000. So if I subtracted those that would put you at for the year about unchanged year-over-year in terms of cost given the declines in revenues. Is that about right?
Yes I believe that to be correct.
Okay. That's an improvement. Okay, also in terms of the cash flow statement, any plans in terms of expectations what you can share with us for your working capital modelling in terms of inventories for '08 and accounts receivable?
Sure, I'll take that. This is Colleen. As far as working capital for the first quarter, we do expect some further buildup of inventory on the Housing Group because of Fort Carson which is, as Rick Bidell mentioned, will continue through May. On the RV side, we expect that the finished goods inventory will probably come down $5 to $8 million in the first quarter. So, net-net we expect maybe the inventory to be relatively flat. AR, we would expect to, as Rick Lavers mentioned, December was particularly low sales volumes, which obviously then translates into slow or low accounts receivable. Again, the military that we experienced last year for Fort Bliss, the payment on the billings was very, very timely. We expect that to continue with Fort Carson, but there is only the timing issue of payments when it's going through multiple levels and coming ultimately from the government.
Okay, and I would assume in your planning for the year, you obviously had an increase in short-term debt to transition through this difficult time, of $10 million. Given your sale of assets and your plans, shall we say for '08, would you expect that short-term debt for '08 would be pretty much eliminated and the balance sheet would be maintained?
By the end of the year, we would anticipate that the line of credit would be significantly reduced.
Okay. For the employees' sake, as long as you don't have a lot of debt, you are in good shape.
All right, thank you very much and good luck for the year.
Thank you Bob.
Thank you. We'll take our next question from Barry Vogel with Barry Vogel & Associates.
Good morning ladies and gentleman.
Rick, I can only ask you one question because I have to go on to a conference call. Why are you so absolutely confident that you're going to be profitable in 2008? Can you spell out certain points of how you get the profitability?
Well, there are several things and I think we have touched on them in the call. We're going to start realizing strategic sourcing benefits that are really quite large that we only started seeing in the second half of 2007 after spending a lot of money in that effort initiation the first half, that our capacity utilization which has been a huge source of our losses is going to dramatically go up. We're expecting it to go up overall about 70% or even a little higher than that percent as opposed to under 50%.
Our new products have been very well received and they are priced properly and to the market so that our gross margins should be going up. The military construction that was new last year has grown considerably this year and it's going to buoy us in the first half and we expect to have additional projects after that to follow on. We have other cost-reduction efforts that we successfully implemented and with what we're doing, as I mentioned, we would be adding some additional revenue streams that we can't quite announce yet, we expect to, even in these markets, be able to at least hold our revenue levels. So, you take the reduced costs and equal or higher revenue levels and that should equal profits.
Now you mean profits on the operating profit line. Correct?
Now why are you teasing us with other revenue streams?
Because there are certain things; you said only one question Barry.
Both are part and parcel of the one question and unfortunately I have to go on another call.
No, because they are just not quite ready and what I didn't want to do is in a week or two announce something and say well why didn't you say something about it at the conference call. So, I'm just letting you know that there will be further announcements, but they are just not quite ready for various reasons.
One question, is it in your Housing Group or is it in your RV Group?
I think you’ll just have to wait.
All right, thanks and I'm going to call you guys this afternoon if that's okay?
Yes, we’re here. We'll be glad to take your call.
Thank you very much. Great work.
(Operator Instructions). We'll take our next question from John Diffendal with BB&T Capital Markets.
Yes good morning. On the RV side, I think you mentioned dealer incentives. I just want to get your sort of sense, especially with some of this downsizing we are seeing by different people. How is that changing the dealer incentive environment, especially on the towable side right now? Anything you are doing different than you weren't say 30 days or 60 days ago?
Yes, this is Mike Terlep from the RV side. The environment is clearly incentive rich and what we have done is we've taken a retail pull-through approach rather than a wholesaling discount approach so that we do not end up devaluating our product long term. We have targeted specifically aged inventory by key accounts, working with those accounts on pull-through programs whether they be interest rate buydown programs on the fixed-term programs or retail rebate coupons, all tied to replacement orders and that is starting to have some impact, as we mentioned in our cost. There always a bit of a lag when you take that kind of approach to the wholesale impact versus just wholesale discounting, but we are pretty confident that that is a better approach and it will ultimately help our dealers more as we look to improve their terms.
And how would you, just looking between the two major segments between motor homes and towables, how do you see differences between the incentive environments in the two segments?
I don't see a lot of difference to be quite honest. They are both pretty rich environments right now relative to rich incentives. The towable business, as you can tell, the day supply of inventory in light of the fact that wholesale has been lagging a little bit behind retail has actually corrected itself to a large degree. The only buildup in the inventory at the dealer level is really Class A’s, as you can see it from the numbers, wholesale is actually exceeding retail. The industry is relatively flat while retail is down. So Class A’s are the area of probably concern relative to a buildup in days of (inaudible) inventory out there. That environment is a little bit richer than on the towables, but there is not a lot of difference from our perspective.
That’s good. Thank you very much.
It appears we have no further questions at this time. Mr. Tryka, I would like to turn the conference back over to you for any additional or closing remarks.
Thank you. We appreciate that you all took the time to join us this morning and we welcome your questions and hope that we've provided thorough answers. We certainly look forward to your joining us on our next regularly scheduled conference call. Thank you very much.
Thank you ladies and gentleman. Once again, that concludes today's conference. We do appreciate your participation.
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