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

Winnebago Industries Inc. (NYSE:WGO)

F2Q08 Earnings Call

March 20, 2008 10:00 am ET

Executives

Sheila Davis – Manager Public Relations and Investor Relations

Bruce Hertzke – Chairman and CEO

Robert Olson – President

Analysts

Scott Stember – Sidoti & Company, LLC

Paul Burton – RBC Capital Markets

Kathryn Thompson – Avondale Partners LLC

Craig Kennison – Robert W. Baird & Co., Inc.

John Diffendal – BB&T Capital Markets

Barry Vogel – Barry Vogel & Associates

Hakan Ipekci – Merrill Lynch

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2008 Winnebago Earnings Conference Call. My name’s Embassy, and I’ll be your coordinate for today. At this time, all participants are in a listen-only mode. We’ll facilitate a question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the presentation over to your host for today’s call, Ms. Sheila Davis, Public Relations and Investor Relations Manager. Please proceed ma’am.

Sheila Davis

Thank you. Good morning and welcome to the Winnebago Industries conference call to review the Company’s results for the Second Quarter of Fiscal 2008 ended March 1, 2008. Conducting the call today are Bruce Hertzke, Winnebago Industries Chairman of the Board and Chief Executive Officer; Bob Olson, President; and Sarah Nielsen, Vice President, Chief Financial Officer.

I trust each of you have received a copy of the news release with our earnings results this morning. This call is being broadcast live on our website at winnebagoind.com. A replay of the call will be available on our website at approximately noon 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, let me offer the following cautionary note. This presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements are inherently uncertain. A number of factors could cause actual results to differ materially from these statements. These factors are contained in the Company’s filings with the Securities and Exchange Commission over the last 12 months, copies of which are available from the SEC or from the Company upon request.

I’ll now turn the call over to Bruce Hertzke. Bruce.

Bruce Hertzke

Thank you, Sheila. Good morning, everyone, and welcome to Winnebago Industries Second Quarter Conference Call this morning. My opening comments today will be brief so that Bob and Sarah will be able to review the quarter’s operational and financial performances, and I’ll save a lot of my comments for some closing remarks.

The second quarter was definitely a challenging quarter for Winnebago Industries. Recently the RV industry and Winnebago have had little positive news, yet we were pleased to ship our very first ERA Class B motor home during the quarter. We introduced this new product at the National RV Trade Show in Louisville, Kentucky in early December and began limited production during the second quarter. The new ERA had a separate brand identity from our Winnebago and Itasca lineup and will be retailed in part through a separate and new dealer base.

We have had tremendous interest in this new product from dealers wishing to include this in their new product line. We look forward to this new product segment to provide some incremental opportunities for us in the future.

Now, I’ll turn the call over to Bob Olson for a review of the second quarter operational performance. Bob.

Robert Olson

Thank you, Bruce, and good morning. Our second quarter is traditionally our seasonally slowest quarter; and unfortunately, the quarter was even more challenging due to a very difficult economic environment.

Our dealer inventories of Winnebago, Itasca, and ERA brand products at the second quarter was 4,837 units, a decrease of 1.8% from the second quarter last year; however, a 10.8% increase from the first quarter of 2008. We anticipate that dealers will continue to control motor home inventories until they can see improvement in the retail motor home market.

Statistical surveys, the Retail Reporting Service for the RV industry, has reported a continued softness in retail motor home sales with Class A and C motor homes combine down double-digits for the past three months and down 16.9% for the most recently reported month of January. On a wholesale shipment basis, RVIA’s economist, Dr. Richard Curtin from the University of Michigan, has also revised calendar 2008 downward to 45,900 Class A, B, and C motor homes, a 17% decrease from actual shipments of 55,400 motor homes in calendar year 2007.

As we have previously indicated, it is our intention to increase our presence in the diesel market. Our goal has not changed. Frankly however, we are not happy with our current diesel market share. Our higher-end diesel lines, the Winnebago Vectra and Tour and Itasca Horizon Ellipse on the new Maxum chassis that were introduced in model year 2008 have been very well accepted.

However, our more economical lines, the Winnebago Destination and Journey and Itasca Latitude and Meridian have not been as well received by the retail market. With input from our dealer partners, we are making further changes to these products for the new 2009 model year which will be introduced in May at our Dealer Days event in Las Vegas. We believe these changes will allow us to capture additional diesel market share as we launch our 2009 products.

We continue to be very bullish about the long-term outlook for the RV industry. We are concerned however about the current economic environment and have yet to see signs of a motor home market recovery. You can’t turn on the news today without being overwhelmed by bad news on the economy, so it’s easy to understand our customers’ reluctance to making a large ticket discretionary purchase.

While the Federal Reserve’s interest rate cuts should have a positive impact long-term, the reductions in interest rates have not yet reached the retail customer. We believe this may cause potential buyers to delay their purchases until they see the rates for motor home loans begin to decline.

Due to the many negative economic factors affecting consumer confidence and resulting in a soft retail motor home market and reduced demand from our dealer partners, we have reduced our employment level by approximately 300 people or 9% of our workforce through layoffs and attrition. In addition, we continue our lean journey to drive out waste in our product and processes wherever possible, and we continue to reduce budgetary expenses in an effort to match spending to current production volumes.

To date, we have kept our production capabilities intact and adjusted our production volumes through reductions in labor force. We will continue to monitor the economic conditions of the country and of our own industry and continue to make adjustments whether that be in labor, facilities or other spending in an effort to right size the demand of our customers.

These tough decisions were made and will continue to be made to help us achieve our primary objective, which is to build quality motor homes while remaining profitable.

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

Sarah Nielsen

Thank you, Bob. Good morning, everyone. I will now review with you the financial performance for the Company’s Second Quarter of Fiscal Year 2008. Revenues for the second quarter were $164.2 million, a 17.5% decrease over the second quarter of 2007. The revenue decrease is primarily the result of unit delivery declines of 406 units or 19.3%, offset partially by an increase in the average selling price of 1.7%. We saw the average selling price increase in every product category this quarter as compared to the second quarter of last year.

Our gross profit margin was 7.4% for the second quarter compared to 9.5% for the same quarter last year. Of the 210 basis point decrease in our margins, the most significant factor was the reduced volume which represented 190 basis point impact. Also contributing to the decrease in gross profit margins were additional promotional programs which was partially offset by increased pricing as compared to prior year.

As discussed in our earnings release, approximately $500,000 of severance related costs were included within general administrative expenses associated with the layoffs that occurred in the second quarter. Conversely, bonus accruals established in the first quarter of 2008 for key management have been eliminated as a result of the second quarter performance.

Our effective tax rate in the second quarter was 31.8% as compared to 31.3% in the second quarter last year. Year-to-date the tax rate has also increased. The increase is primarily due to increased state taxes. Net income for the quarter was $2.5 million as compared to $7.5 million last year.

I will now highlight a few significant balance sheet items. Inventories are up over 27 million from the end of the fiscal year primarily due to increased raw material chassis inventory and to a lesser extent due to increased finished good inventory. As discussed in our first quarter conference call, our chassis inventory was up significantly in the first quarter for a variety of reasons such as new product launch, chassis model year changeover and softening market conditions, and we did not anticipate that we would significantly work through these additional chassis until the third quarter. This is still our expectation. I will say that we are not pleased with the inventory levels and that we are working very hard to reduce all categories in the coming months, including chassis inventory.

I’ve noted in our earnings release, at the end of our second quarter, the Company held 54.2 million of investments in highly rated tax exempt auction rate securities that were recorded at par value and classified as long-term. For the last 20-plus years and up until February of 2008, the tax exempt auction rate securities market was highly liquid; therefore, we have historically classified these as short-term investments.

During the week of February 11th, a substantial number of auctions failed, meaning that there was not enough demand to sell the entire issue at auction. From the time the auctions began to fail to the end of our quarter, we were able to successfully sell 10% of our portfolio; however by March 1st, almost every security that we held had experienced a partial or a complete auction failure. The immediate effect of a failed auction is that the holders cannot sell their securities and the interest or dividend rate on the security generally resets to a penalty rate. We have seen that to be the case with the investments in our portfolio as most of the interest rates are quite a bit higher than what we can earn elsewhere.

The securities for which auctions have failed will continue to accrue interest at the contractual rate and be auctioned generally every 7 to 35 days until the auction succeeds, the issuer calls the securities, or they mature. The state of maturities of our investments range in duration from 16 to 33 years. These investments are recorded at par value, which is consistent with how we have historically treated them and also what has been financial industry convention and what was reflected on our February Broker Statement. However, we are currently evaluating if these investments are appropriately valued at par value due to the significant changes in the market conditions and will resolve this analysis upon filing the 10-Q for the second fiscal quarter.

We do not believe that this is a credit risk, but rather a liquidity risk. As such, we have reclassified these auction rate securities as long-term investments as we are uncertain as to when we will have the ability to sell these securities. We continue to believe that we ultimately recover all amounts invested and that we can manage liquidity risk through cash flows generated from operations. At the end of the quarter, we had $15.5 million and as of yesterday that cash balance had grown to $30 million.

Last quarter in our earnings release we noted that we had adopted the new income tax accounting standard FIN 48 and as a result established a liability related to uncertain tax positions as required. During the second quarter, over $11 million was reclassified as current liabilities, which is included within the crude expenses, due to that fact that we anticipate resolution through expected settlements or payments in the next 12 months. Of this amount, up to $4.5 million may positively impact our effective tax rate in future quarters.

As I mentioned previously, we completed the quarter with $15.5 million in cash and cash equivalents. During the first 27 weeks of this fiscal year, cash used in operations was $12.6 million as compared to $13.1 million of cash generated from operations last year. This is primarily a result of the increase in inventory levels that I’ve already discussed and also due to decreases in accounts payable and accrued expenses.

From a capital expenditure perspective, we have spent $2.5 million year-to-date and expect to spend in the range of $5 to $6 million for the entire fiscal year. We have also paid approximately $7 million in dividends.

I will now turn the call back over to Bruce for final comments.

Bruce Hertzke

Thank you, Sarah. Today will end another journey for me at Winnebago Industries as this will be my last conference call. I would like to thank you for the privilege of working with many of you over the past decade as Chairman and CEO of Winnebago Industries. As I leave Winnebago in my 37th year with the Company, I’m happy to say, it’s in a much stronger financial position and product position than we were 10-plus years ago.

I’ve told Bob, Sarah, and the rest of the executive staff that the current conditions are tough, but you’ll have a great opportunity when the economic conditions turn favorable. It’s times like this that the market leaders who are well financed have a strong reputation for quality will survive to grow even stronger in the future. Winnebago Industries is just that.

Winnebago and our industry are experiencing some tough times now, but we will weather the storm only to have less competition and a better opportunity for the next economic upturn. I believe the strong returns that Winnebago Industries produced in the past will return when a better economic environment returns. Bob and his team are ready to take on this new challenge and lead Winnebago Industries into the next decade of growth and prosperity.

I’ll now turn the call over to the operator for the question-and-answer potion of the call today.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Mr. Scott Stember with Sidoti; please proceed.

Scott Stember – Sidoti & Company, LLC

Good morning. Sarah, could you give the ASPs this year versus last year by segment?

Sarah Nielsen

Oh certainly. For Class A gas, our average price was $90,907; Class A diesel was $171,059 so the average for Class A was $118,050. Class C was $62,805 and our average ANC was $90,102. Class B was $69,244 and an aggregate, we’re looking at an average ASP of $90,090.

Scott Stember – Sidoti & Company, LLC

Would you have last year’s figures as well?

Sarah Nielsen

At the end of the second quarter for 2007, our Class A gas was $81,933, our Class A diesel was $155,574. Class A in aggregate was $105,995. Class C was $59,504, an average ANC was $88,597.

Scott Stember – Sidoti & Company, LLC

Could you talk about during the quarter where your capacity utilization rates were and maybe talk about with the current environment where they are projected to be over the next 6 to 9 months?

Robert Olson

For the quarter we were at about 52% of our production capacity. As I had made in comments, we’ve tried to adjust our capacity right now with adjustments in our labor force. Right now if the schedule stays as is and the economy doesn’t get any worse, just from a seasonal standpoint we should have better capacity. But there’s, like I say, in this type of environment, it’s hard to project.

Scott Stember – Sidoti & Company, LLC

With regards to the inventory balances, Sarah, you talked about finished goods. Could you talk about maybe the level of finished goods in the quarter versus last year?

Sarah Nielsen

Certainly. We did see finished goods go up a bit and part of that is a function of building some rental units that will be shipped in our third quarter. But as we compare to the end of the fiscal year, our finished good position is up about 15%. As I mentioned earlier too, the significant increase is really associated with our raw material chassis position, which is up approximately $24 million.

Scott Stember – Sidoti & Company, LLC

Also discounting, it’s obvious that things are tightened up. What are you guys seeing? What happened in the quarter and what are you seeing currently as we speak right now with dealer discounting?

Robert Olson

I don’t think we’ve seen the discounting go as crazy as it did here a couple years ago. As you can see by our financials that we’ve done a little bit of it, but it’s basically to help some of our ’07 product to make room for the ’08, some of the things that we had out there that we needed to help our dealers with to move their lots and ours so…

Scott Stember – Sidoti & Company, LLC

So we’re not at the levels that we seen 2 or 3 years ago but…

Robert Olson

No, we don’t think so.

Scott Stember – Sidoti & Company, LLC

Just last question on the issue with the reclassified short-term securities: Could you maybe disclose what the actual penalties have been so far and what it meant on an earnings basis?

Sarah Nielsen

Oh in relation to the yields that we’re currently receiving?

Scott Stember – Sidoti & Company, LLC

Yes.

Sarah Nielsen

All these are tax exempt, we’re near double digits in our yield.

Bruce Hertzke

There has been no penalties. We’ve actually got a premium. The penalties that we haven’t been able to cash them.

Scott Stember – Sidoti & Company, LLC

Oh okay.

Bruce Hertzke

But the interest rate has actually increased in a lot of cases.

Scott Stember – Sidoti & Company, LLC

Gotcha. You would expect over time as the market becomes more liquid that you would be able to move these and reclassify them as short-term again?

Bruce Hertzke

Yes, they’re AAA security, so we think they’re very good paper.

Scott Stember – Sidoti & Company, LLC

That’s all I have. Thank you.

Operator

Your next question comes from the line of Mr. Paul Burton with RBC Capital Markets; please proceed.

Paul Burton – RBC Capital Markets

Good morning. I have a question about demand elasticity to interest rate cuts. Retail financing rates have been in a fairly narrow bandwidth for the past several years. How impactful do you think it will be the demand if retail rates drop by say 50 or 100 basis points?

Bruce Hertzke

I think it’s fair to say that interest rates have always helped our industry. It’s just how soon that they will help the consumer. I think the consumer in a lot of cases right now is worrying about his net worth and his home values and it definitely will help future consumer confidence, and I think it will definitely help our business. How soon, I wish I could tell you. I believe it’s going to take some time though.

Robert Olson

I think one of the other things that you can look at interest rates helping this industry, if you go back to 2004 which was one of the best years that we’ve had in this industry, interest rates were very, very low at that time and that was just one of many indicators that helped the market. So we think that interest rates, especially being reduced from a long-term standpoint will definitely help both us and the industry.

Paul Burton – RBC Capital Markets

I think, Sarah, you mentioned that management bonus accruals were eliminated in Q2. I’m wondering if you had them in Q1, how much and do you have any plans to reverse the accruals given the current market conditions?

Sarah Nielsen

Well our annual plan is based on EPS and return on invested capital. In the first quarter, we are doing very well as compared to last year which was while we were recording bonus expense. In relation to where we are year-to-date, we are meeting the objectives of the program and that is reflected in our financials, obviously EPS is now down over last year. So it really is contingent upon how we do prospectively; and if there’s improvement, that would be the case; but if there isn’t, then we are looking at having no bonus for the year.

Paul Burton – RBC Capital Markets

Sure. What do you think appropriate level of dealer inventory in the current demand environment is?

Robert Olson

Looking back at history, I just happened to go back this morning in preparation for this and you look at our dealer inventory where we were at the end of the second quarter, historically it’s well under where we’ve been for the last 6 years. Now things are a little bit different right now because I think our dealer partners are looking at their inventories a little bit closer. They are wanting things to turn. I think the turn is probably more important, so they keep their flooring plans down, and I think it’s going to vary depending on each one of our dealers, each one of them have a little bit different variation of what their philosophies are as far as inventories are concerned. At our 4,836 I’m not overly concerned with that dealer inventory, but like I say historically it’s in pretty good shape.

Paul Burton – RBC Capital Markets

Then on the Class Bs, can you give us some sense of how to model the initial pipeline fill of the Class Bs based on backlog, can we assume that 178 units of backlog amount to a partial order of shipment?

Bruce Hertzke

Just like when we started the 500 series, which was our View and Navion product, there were some chassis restraints and it took us awhile to catch up with the backfill. We’re experiencing some of that with the B/Van also and so as we can get product, we’re going to get it to the marketplace as fast as we can get it there. But some chassis restrictions are going to affect part of our opportunity.

Sarah Nielsen

Our backlog represents what we expect to ship in the next six months, so we’re still looking at third quarter being a time of ramping up and by fourth quarter we should have a more normalized level of shipments going out the door.

Bruce Hertzke

As long as we can get the chassis because this is kind of a new territory for us; we’ve had pretty good luck getting our new Navion chassis but because this is a new chassis, we’re kind of standing in line like everybody else is.

Paul Burton – RBC Capital Markets

That’s all I had. Bruce, good luck from Ed and myself.

Bruce Hertzke

Thank you very much, enjoyed working with you.

Paul Burton – RBC Capital Markets

Thanks.

Operator

Your next question comes from the line of Ms. Kathryn Thompson with Avondale Partners LLC; please proceed.

Kathryn Thompson – Avondale Partners LLC

Thanks. Bruce, best of luck on your retirement.

Bruce Hertzke

Thank you. You did a nice job on TV this morning.

Kathryn Thompson – Avondale Partners LLC

Thank you. A couple questions: First on inventory, I know you’ve given a little bit of color about your different inventory level. Do you have a target for Q3 or for the fiscal year end, and also breaking that out between finished goods and your chassis inventories?

Sarah Nielsen

Ideally we still like to have our level be back near that $90 to $100 million that we’ve discussed before. In the current environment, we definitely are working through some additional chassis inventories because a lot of the commitments and orders placed for those were well in advance of the significant downturn that we saw in the back half of ’07. So we don’t anticipate that we’re going to be able to work our way all the way through it by the end of the third quarter, but our goal is to be at that range by the end of the fiscal year. From a finished good inventory standpoint, we’re looking right now at shipping a lot of our rental business in third quarter which will reduce our finished inventory levels also, but part of it is really dependent upon the mix of the product because we do see that our average price is going to be moving based on the types of price that we’re shipping, so that’s a little bit dependent there. But I guess to answer your question, our goal is to be down toward that $100 million range by the end of fiscal year.

Kathryn Thompson – Avondale Partners LLC

Were there actually cancelled orders in the back half or the last quarter of ’07 that resulted in the increase in chassis inventory?

Sarah Nielsen

No there was not. Primarily it was a result of looking out into the future and trying to forecast the chassis positions and support that the demand that we had been seeing historically. So that is not based on an order position that we have to forecast out much further than that. So it’s not a function of order cancellation; it’s a softening environment and it turning much more quickly than we had anticipated.

Kathryn Thompson – Avondale Partners LLC

Great. You gave capacity utilization for the quarter, is there any current update on capacity utilization?

Robert Olson

Nor for this quarter, we’ll report that next quarter, Kathryn.

Kathryn Thompson – Avondale Partners LLC

Well no, no, I mean just like you said at the previous quarter end, at the end of Q2 is 52% but has there been any change since then is really what I’m trying to get a sense of.

Robert Olson

Not really.

Kathryn Thompson – Avondale Partners LLC

Also, you saw an increase in accrued expenses, what was the driver for this?

Sarah Nielsen

That was primarily the reclassification of that uncertain tax position liability that I touched upon. We had $11 million reclassified out of long-term into short-term and that’s in that accrued expense line item.

Kathryn Thompson – Avondale Partners LLC

Finally, what’s your appetite for repurchasing stock, and does your cash situation impede your ability to repurchase?

Sarah Nielsen

Well in our second quarter, as we have not purchased any stock back since our first quarter, there were two functions in that that I wanted to touch upon. First, we were out of the market until Bruce’s announcement was made public, and then shortly after that occurred, we did have all the auction failures start in the middle of the month of February and that’s been our main concern to work through that. But as I commented, our cash position has increased fairly substantially and as we pull money out of the auction rates, we are not going back into that type of investment. We don’t anticipate we’re going to have any liquidity issues, but our first concern is to work through that and then secondly would be to take advantage of opportunities in buying stock.

Kathryn Thompson – Avondale Partners LLC

All right, well thank you very much.

Operator

Your next question comes from the line of Mr. Craig Kennison from Robert W. Baird; please proceed.

Craig Kennison – Robert W. Baird & Co., Inc.

Good morning, everybody. With respect to gross margin, obviously we’re all trying to get a feel for where that could be so we can set the right expectation with our estimate. Part of the influence will be the layoff that you announced. Can you give us any dollar quantification around the cost saving you expect on a quarterly basis from that layoff?

Sarah Nielsen

Well as we touched upon, the one-time severance cost associated with these position eliminations was approximately $500,000 and we look at that would be the savings we’d see on a quarterly basis prospectively, so nearly $1 million in the back half of this year.

Craig Kennison – Robert W. Baird & Co., Inc.

That’s helpful. Then sometimes you’ll comment on just your forward margin guidance giving a range so that we set the right expectation. Would you expect a meaningful improvement for this level as you ramp your capacity utilization a little bit?

Sarah Nielsen

That’s a tough question. In relation to what’s happening in the marketplace, it’s challenging in relation to the dealer demand and sluggish retail. So unless we see some improvement in relation to those two key factors, it’s going to be difficult to have a substantial amount of improvement sequentially. Now we do have the benefit of our third quarter does not have as much of a shutdown as what we typically see in the planned vacation over Christmas and some of the elements of overhead that are more associated with the winter months. But it’s really going to be a function of what we ship and the volume levels and so it’s challenging on the margin side and it’s hard for us to be confident in what that will be too.

Craig Kennison – Robert W. Baird & Co., Inc.

Obviously you have to forecast to some extent what your expectations will be to set the right cost structure because this business doesn’t really work well at this level of gross margin. Do you think this is enough of a cut given your expectations for the market or you could see more if things deteriorate?

Robert Olson

We monitor that every day and a lot of it’s going to hinge on retail. We’ve gotten questions about inventory levels and things like, you realize that our objective is to reduce inventories and not raise them. So to say, “Is this enough?” As we know it today, we think it’s a good plan forward. The problem that we’ve got is there’s so many uncertainties out there in the economy that is it going to have an adverse impact on retail; is it going to stay the same, or is it going to get better? Really I think our forward stance right now is going to be we’re going to be so closely tied to retail that we’ll have to make decisions around that.

Craig Kennison – Robert W. Baird & Co., Inc.

You mentioned dealer inventory. Would you expect a normal sequential decline again this quarter as you would’ve historically?

Robert Olson

Again, I’m not sure of that either because there’s so many uncertainties out there. We’re going into our 2009 product launch which typically you get a few additional orders there. You go into that next quarter and we’re still introducing 2009 product. I think a lot of it is going to hinge on the appetite and either conservatism or optimism of the dealers to floor additional units or less units. Again, I think a lot of it is going to depend on just what that retail activity is going to be out there in the marketplace.

Craig Kennison – Robert W. Baird & Co., Inc.

That gets to my last question: On the diesel market share, that can’t be satisfactory from your perspective? What kind of changes are you making and is it the problem that dealers don’t feel like the product will sell or that the dealers have purchased the product and it’s not turning? In other words is it a wholesale problem or a retail problem, and how can you give us some reassurance that maybe market share gains are on the (inaudible)?

Robert Olson

Well I think go back and give you a little history lesson. We introduced the Destination and Latitude not at last Dealer Days but the Dealer Days prior to that and when we took it down there, we knew we were taking a gamble because it looked different than any other motor home in the industry at that price point, but we felt good about it. We went down to Dealer Deals with it, introduced it, had an unveiling and our dealers went through it, some of you guys were down there went through it and we didn’t hear really any negatives to that vehicle. In fact we heard things like, “Gees, we can’t believe that you guys created that in Ford City, Iowa.” “Finally, something out there that looks different than my grandma’s kitchen.” It looks like a flat that you’d see in New York or Chicago.”

So we left Dealer Deals feeling very, very good about this product, and I think the dealers showed us that same optimism because we had a good wholesale activity with that product as well. But I think once we got out into the dealer channels and the retail customers started looking at, they said, “Yeah, that’s nice but I don’t think it’s for me yet.” It’s not like we haven’t sold any. We’ve sold several of them, but it’s more to like the professional type individuals, the younger crowd. We think it’s still a viable product and we certainly haven’t given up on it because, as we mentioned before, we are making some changes for ’09.

Now I don’t want to give away anything that we’re doing in ’09, but trust me, we have listened; we have talked to several of our dealer partners and they have given us suggestions on this product and we will be unveiling at Dealer Days, so I suggest you come out and see us, and you’ll be able to see the product what we’re doing with it. But I’m optimistic that we’re much closer to being on the mark with the ’09 product than we were with the ’08 product.

To answer your other question, I think right now it really is more of a retail issue and that is a wholesale issue.

Craig Kennison – Robert W. Baird & Co., Inc.

That’s very helpful. Once again, Bruce, best of luck to you from all of us at Baird. Thanks.

Bruce Hertzke

Thank you, Craig.

Operator

Your next question comes from the line of Mr. John Diffendal, BB&T Capital Markets; please proceed.

John Diffendal – BB&T Capital Markets

First off, Bruce, I’ll be missing hearing you on the call and dealing with you as well, so congratulations on your retirement.

Bruce Hertzke

Thank you.

John Diffendal – BB&T Capital Markets

Secondly, going back to the recess for a second, you mentioned when you file your Q, you’ll make a decision on whether you’ll take an impairment. Have you accounts mentioned whether anyone else that’s been in the same situation, has anyone else taken any sort of write down on those assets?

Sarah Nielsen

That’s a very interesting question. We’ve had that conversation to a great extent many, many times. Our challenge is we’re right on top of this event and our quarter ended 2 weeks after all this kind had unfolded and to go back over what other companies have done, a lot of companies that reported at the end of the calendar year or at the end of the January, this was a subsequent event. So I think the rules are still being written from an accounting guidance standpoint and it’s very fluid and changing based on new information daily. So there are some other significant companies with this kind of portfolio as the end of February and then at the end of the calendar quarter, I think you’re going to even see more I guess data points or comparison points.

When you look at the kind of securities that we have on the student loan or municipality type AAA rated security, it’s very solid from a credit risk standpoint. Our challenge is that the par value designation that has been the history of presenting it to establish an independent valuation with no secondary market really is migrating towards evaluating a typical kind of security and doing some discounted cash flow analysis. So there are companies out there that have taken impairments, but I would say a lot of the kinds of companies that have had asset-backed or CDO type securities. But it then sets a dynamic and changing circumstances and very challenging to obtain help with valuation that we’re in the situation we are. So we’re working to resolve that here as quickly as possible.

John Diffendal – BB&T Capital Markets

So you’re kind of the leading edge of this given the timing of your quarter.

Sarah Nielsen

Exactly, and even the fact that we reclassified a long-term is a different position than a lot of companies have taken.

John Diffendal – BB&T Capital Markets

Exactly.

Sarah Nielsen

It’s true in relation the liquidity is very real or illiquidity because they are failing still daily. So we are pulling out money when we have the ability to and we’re getting great returns while we’re invested in these types of assets, but the market’s so completely dislocated and there’s so much panic and every day there’s some announcement that creates more panic. This is a pretty real issue.

John Diffendal – BB&T Capital Markets

You mentioned the tax rate, some of the shifting dollars there. What’s your guess at this point for the full year rate so you sort of think about the second half rate would be in the timing of the movement of those dollars you mentioned?

Sarah Nielsen

Well we look at our effective tax rate on an annual basis to be 33%. But however I mention that we have in the next 12 months visibility or anticipation of resolving some uncertain tax positions so that could be in the back half of ’08 or it could be in the first part of ’09. Until those events, I can’t consider that in my rate. So from a normal standpoint, it’s 33% but there is some tax positions if they are resolved that would reduce that rate.

John Diffendal – BB&T Capital Markets

Lastly, Bob or Bruce, you mentioned I mean the inventories are up at the dealer level certainly relative to the prior quarter and the backlog, especially when the diesels down three-quarters or whatever, I guess… Am I wrong certainly would assume that some of that, as you said, build up especially of the Destination and the Latitude there. So do you expect that you’ll have to be taking specially as you’re changing, your ready to turn your model, it would be taking some additional discounts to move that as you get ready to update that product as you mentioned in May?

Bruce Hertzke

Well we’ve tried very hard. I think if you look at our financials, our discounting has been up a little up this quarter and so we were diligently at that. I guess the good news, we’re sitting in pretty good shape at the factory. Now it’s just a matter of are dealers getting it into the retail channel? We’ve offered some help on that already. So we feel good that if the economy picks up along with what we’ve done so far that we should be able to move some of that product off.

John Diffendal – BB&T Capital Markets

But there is a fair… I’m not wrong in assuming that there’s a pretty big concentration of diesels in that inventory sitting there that still has to be sort of purged.

Sarah Nielsen

Well let me look back over the last few quarters or historically. The percentage of diesel inventory and backlog, or excuse me, in dealer inventory, it’s not proportionately different. I don’t want to send an alarm signal on that point. I mean I think it’s very real that we have to be supportive of moving some of the units that aren’t maybe as widely received on the retail side. But as a percentage, our diesel inventory isn’t out of line as to where it’s been.

John Diffendal – BB&T Capital Markets

Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Barry Vogel of Barry Vogel & Associates; please proceed.

Barry Vogel – Barry Vogel & Associates

Good morning, ladies and gentlemen. Before I forget, Bruce, it’s been a total pleasure dealing with you since I’ve known you.

Bruce Hertzke

Well thank you, Barry. Same to you also; I’ve enjoyed the relationship.

Barry Vogel – Barry Vogel & Associates

Are you going to go down to Louisville or you’re just never go there again?

Bruce Hertzke

I’ve been to 25-plus Louisvilles, I think that’s enough.

Barry Vogel – Barry Vogel & Associates

Best of good luck, good health, and good fortune.

Bruce Hertzke

Thank you.

Barry Vogel – Barry Vogel & Associates

Now going back to the inventory issue with you guys… Sarah, can you give us a breakdown first of all in dollars in your inventory of $128 million into finished goods, work in process, and raw materials, and breakdown the raw materials, I guess, or wherever the chassis are.

Sarah Nielsen

We had approximately $52.5 million in finished goods and work in process was $36.9, raw materials, which is where our chassis inventories are, is approximately $163, and then we had a LIFO reserve of $34 million to arrive at $128 approximately.

Barry Vogel – Barry Vogel & Associates

How much was the LIFO reserve?

Sarah Nielsen

$34 million.

Barry Vogel – Barry Vogel & Associates

In the chassis, was that in raw materials?

Sarah Nielsen

Yes.

Barry Vogel – Barry Vogel & Associates

How much were the chassis?

Sarah Nielsen

Over $50 million.

Barry Vogel – Barry Vogel & Associates

$50 million?

Sarah Nielsen

Yes.

Barry Vogel – Barry Vogel & Associates

All right, $50 million was chassis. Now as far as, I don’t know if you have the figures, do you have on the models that you have in dealer inventory, are there any 2007 models that you know of?

Robert Olson

I’m sure there’s a few.

Bruce Hertzke

Yes, there would be.

Sarah Nielsen

Well yeah, we always look at the aging in relation to the time the units have been on the lot. In relation to what’s over 12 months, it’s fairly similar where it’s been historically, but there are a portion of units that have been sitting in the dealers lots in excess of 12 months.

Barry Vogel – Barry Vogel & Associates

All right, so as far as over the last 12 months it’s normal as far as aging?

Sarah Nielsen

Yes.

Barry Vogel – Barry Vogel & Associates

Because you’ve had a very aggressive purging of inventories that were left over at the end of each year and I would think you’re going to do the same thing this year, correct?

Robert Olson

If necessary.

Barry Vogel – Barry Vogel & Associates

Now as far as the Class Bs, I just want to make sure I got this straight. You imply that you would ship the backlog in he second half of the year, which would amount to about 180 units. Is that the correct assumption?

Sarah Nielsen

Yes.

Bruce Hertzke

Yes, assuming that all the chassis get here on time.

Barry Vogel – Barry Vogel & Associates

Now who provides the chassis of this Class C?

Bruce Hertzke

These are Dodge Sprinter chassis, (inaudible) chassis.

Barry Vogel – Barry Vogel & Associates

It’s more difficult I’m assuming because you have competition getting some Sprinter chassis?

Bruce Hertzke

Well it’s just a popular product overseas. It’s an allocation basis.

Robert Olson

Not only are we competing with other B/Van manufacturers, but this is a widely used chassis in a lot of fleet companies, so it’s a worldwide allocation and we’re finding out that it’s a little bit more difficult to get the chassis than what we’re accustomed to.

Barry Vogel – Barry Vogel & Associates

So now if that’s case in fiscal ’09, you might have a chassis problem again.

Bruce Hertzke

Well we think that they should be able to ramp-up and catch-up in production. That’s there indication to us that it’s going to continue to improve.

Barry Vogel – Barry Vogel & Associates

All right, based on your dealer, your initial dealer responses, and I know I don’t want you to project, but you have a certain amount of dealers in this new dealer base and am I right that it’s just for these dealers and not your other dealers?

Bruce Hertzke

Yes.

Barry Vogel – Barry Vogel & Associates

So in other words…

Bruce Hertzke

Barry, it’s a combination between current dealers that we already have for our ANC categories, certain ones, but then we will also be looking for other dealers that specialize in B/Van marketing.

Barry Vogel – Barry Vogel & Associates

So in looking at your select dealers that you currently have now and the 50 dealers that you already signed up, what would be a good approximation of the amount of dealers you’re starting in fiscal ’09 that might be able to carry the product?

Bruce Hertzke

In access of 100.

Barry Vogel – Barry Vogel & Associates

So over 100 dealers, and that’s very narrow compared to your current dealer base.

Bruce Hertzke

Yes.

Barry Vogel – Barry Vogel & Associates

What do you think will be a fair pipeline fill for a dealer assuming in fiscal ’09 per dealer?

Robert Olson

That’s going to vary on each dealership, but I’d say on average twoish.

Barry Vogel – Barry Vogel & Associates

Twoish, on a pipeline filled basis that’s only 200 units, I’m sorry, yeah, am I right? 200 units just on the pipeline filled?

Robert Olson

Well but then we’ll be turning and selling also and then feeding on top of that.

Barry Vogel – Barry Vogel & Associates

Bob, as far as your backlog in Class Cs, that’s was very impressive to be up 10.8% versus last year because it was a pretty good product last year. How come you were so successful in this tough environment?

Robert Olson

Well I think we’ve got a couple things. We’ve introduced a couple new floor plans. We’ve got some rental going on. The Navion iQ is new; the 231J for Winnebago dealers were new. We do have some rental product that’s in there. You look at our overall lineup and I think we’ve got a very good C (inaudible) lineup.

Barry Vogel – Barry Vogel & Associates

Now have any of your competitors been getting the Sprinter chassis to compete with you and Navion?

Robert Olson

Yeah, we’ve been hearing some, but we know we’ve seen quite a few in the different shows that we’ve seen and we haven’t heard a lot about what’s out on the dealers’ lots, but we’re sure that they’re starting to get some out into the pipeline.

Barry Vogel – Barry Vogel & Associates

Now as far as the Bs, what’s your best estimate as far as operating margins? Do you think it’ll be equivalent to your Cs potential profit margins on the Bs?

Bruce Hertzke

Yeah, I think that’s a fair assumption, Barry.

Robert Olson

It’ll be comparable.

Barry Vogel – Barry Vogel & Associates

All right, the same as Cs. A lot of questions have been asked, so I don’t have… Oh, I know what I wanted to ask you, Bruce and Bob, you’ve been around a long time at Winnebago, you’ve seen all kinds of markets, we’re entering the season with a very backlog and you’ve been a recession now for a Class A motor homes for over three years and by any stretch, all of the things that are out there that you talked about and considering the incredible high level of discretionary purchase the Class As are, I’m asking you both your opinion, you think you’ll have an extremely muted seasonal up tick, in fact maybe hardly any seasonal up tick?

Bruce Hertzke

Just because it’s spring, we will see some up tick. I think the markets already down very considerable and I think the up tick that we’re going to see compared to other years is definitely going to be less because we’re at a less rate already. So I don’t know how else to answer that, Barry, other than the fact we haven’t seen any indications… If you’re asking if we’ve seen any indications that the markets taken off, I don’t think us, RVIA or anybody in the industry is giving any type of indication like that.

Barry Vogel – Barry Vogel & Associates

No, no, I’m not looking for taking off, but I’m concerned if there’s hardly any seasonable up tick, that would be pretty bad.

Bruce Hertzke

I think you’re going to see a somewhat comfort this year. All you got to do, Barry, is turn on the TV and until some of that starts going away and we get some fixes to all of the things that are going on with the Fed right now, you’re going to have people being very cautious. I think if we can start getting some of those things fixed, you’re going to start seeing an up tick. But from a spring standpoint, I think it’s got to be temper just simply because of consumer confidence and everything else. Now how much is it going to be tempered, we’re not really sure. As you know, things are changing daily around here. I’ve often said that where this thing is going to finally turnaround is hopefully sometime post election.

Barry Vogel – Barry Vogel & Associates

So post election means the next 2 or 3 quarters will be difficult.

Bruce Hertzke

I think they will be. I think we’d be kidding ourselves if we didn’t think they were going to be difficult.

Barry Vogel – Barry Vogel & Associates

I think you’re absolutely 100% right, and I know you’ll do whatever you can to be as lean and mean as possible and so I have confidence in you that you’ll do that. But you cannot change the market, but all you can do is I guess adjust some of your products, like you were talking about at the dealer.

Bruce Hertzke

We’ve learned a valuable lesson over the years is that we have to manage our way through these tough times, and we’ve done it for 50 years. We’ve seen it where it’s been a whole lot worse; we’ve seen it’s where it’s been a whole lot better. I think we’ve got the things in place that will allow us to do that.

Barry Vogel – Barry Vogel & Associates

Now as far as your price points, I know you made some adjustments in the last 12 months, particularly in Class As lower price points, is that been helping you?

Bruce Hertzke

Yes, I think it’s helped our Class A gas products as far as volume on that. That’s where we’ve slipped in some diesel, we have done okay in our gas products.

Barry Vogel – Barry Vogel & Associates

Now correct me if I’m wrong, because I don’t remember all these things, but the curved cabinets, was that Latitude and the Destination?

Robert Olson

Yes, and the Journey and Meridian as well.

Barry Vogel – Barry Vogel & Associates

Because I was one of those who thought it was a pretty nifty product.

Bruce Olson

You didn’t buy enough.

Bruce Hertzke

You weren’t alone, Barry.

Barry Vogel – Barry Vogel & Associates

Now I know why you’re so cautious and made your changes. Now as far as any new changes, anything major for the new model year? Is there anything you’re planning that would be a major change in product development?

Robert Olson

You’ll have to come to Dealer Days and see, Barry, sorry.

Barry Vogel – Barry Vogel & Associates

All right, thanks very much and it’s been a long haul on the way down here and it’s going to take time, there’s no question about it. Thank you very much for your help. Good-bye.

Operator

Your next question comes from the line of Mr. Hakan Ipekci; please proceed.

Hakan Ipekci – Merrill Lynch

We’re all set. Thanks.

Operator

I would now like to turn the call over to Mr. Bob Olson for closing remarks. Please proceed, sir.

Robert Olson

I’d like to thank everyone for joining Winnebago Industries conference call today. I’d also like to thank Bruce for the 37 years of his service and leadership. I think the measure of success if you leave something better than you took it over, and I think we can honestly that that was the case. So again, Bruce, happy trails and we look forward to talking to you again in June when we report our third quarter fiscal 2008 results. So thank you.

Bruce Hertzke

Thank you, Bob.

Operator

Ladies and gentlemen, this now concludes your presentation. You may now disconnect. Have a good day.

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

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

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

Source: Winnebago Industries Inc. F2Q08 (Qtr End 03/01/08) Earnings Call Transcript
This Transcript
All Transcripts