Monaco Coach Corporation Q1 2008 Earnings Call Transcript

Monaco Coach Corporation (MNC)

Q1 2008 Earnings Call Transcript

April 23, 2008 2:00 pm ET

Executives

Kay Toolson – Chairman and CEO

Marty Daley – CFO and VP

John Nepute – President

Analysts

Scott Stember – Sidoti & Co.

Greg Badishkanian – Citigroup

Kathryn Thompson – Avondale Partners

Ed Aaron – RBC Capital Markets

Mike Roarke – McAdams Wright Regan

Craig Kennison – Robert W. Baird

John Diffendal – BB&T Capital Markets

Barry Vogel – Barry Vogel & Associates

Frank Magdlen – The Robins Group

Bob Simonson – William Blair

Juan Gomez – BB&T Capital Markets

Presentation

Operator

Good day and welcome to the Monaco Coach first quarter conference call. Today's call is being recorded. Before we begin, please allow me to read the following Safe Harbor Statement. Certain statements made during the course of this conference call may be forward-looking. These statements are based on current information and expectation, and involve a number of risks and uncertainties. Actual results and events may differ materially from those projected in such statements due to various factors. For more information concerning these statements due to this and other possible risks, please refer to the company's most recent form 10-K, forms 10-Q, and other filings with the SEC. These filings can be accessed on the SEC's web site at www.SEC.gov.

We'll now turn the call over to Mr. Kay Toolson, Chairman and CEO. Please go ahead, sir.

Kay Toolson

Thank you, Jason. Welcome to our conference call to discuss our first quarter results, as well as give you an update on our business plan. With me today are John Nepute, President of our company; Marty Daley, our Chief Financial Officer; Craig Wanichek, Director of Investor Relations, as well as other members of our senior management team.

I will start off by stating the obvious. We are disappointed by the results in the first quarter. We worked very hard over the last 18 months to reduce our overhead and lower our breakeven point. Our team has done a great job of driving our cost down and consolidating plant and sub assembly operations wherever possible. When we were forecasting for 2008, we were assuming that the market would be flat or down just slightly from 2007. However, we are facing the fourth year in a row of declining class A motor home sales and so far, 2008 is starting off with class A sales down over 20% from last year's already lower market.

Additionally, when we were planning for 2008, no one was predicting the continuing decline of consumer confidence, caused in part by deteriorating consumer credit markets and record-breaking prices for crude oil that we are now experiencing. Our decline in revenue along with negative impacts from our warranties, settlement reserves, and our benefits plan, significantly depressed our results in the first quarter. Since we do not see a quick change or uptick in the retail environment for RVs, we will be taking additional steps to reduce our costs and lower our breakeven point. We will continue to lower our production run rates, reduce our SG&A and our overhead costs, and more quickly facilitate other consolidations within our company. While these steps are painful for many of our great employees, they are necessary to ensure the long range stability and strength of our company.

Additionally, we're focused on new product introductions that we feel will augment our business. Our new Class C units on the Sprinter Chassis will start rolling off the production lines in June and our new Super C product will be debuted in September. These new products will give us visibility and sales in a market that we have not previously participated in. And as we've talked about during the last two quarters, we're working on a new lightweight, very fuel-efficient product, we plan to introduce in early 2009. This will be a brand new class A model, which should have a significant positive impact on our company and sales, both domestically and internationally.

We also continue our focus on improving our Towable offerings, both fifth wheels and travel trailers, as well as Class C products in an effort to continue to grow these segments of our business. Outside the products, we remain focused on developing motor home resorts. We're excited about the two new resort projects in Naples, Florida and Bay Harbor, Michigan, which should both have lots available for sale in the third quarter.

Again, I want to reiterate that we are certainly not satisfied or pleased with our results this quarter. But, we are dedicated to making sure that we make the changes necessary in our company to be profitable at these lower rates. And when the market does return, which it will, we'll be a much stronger and a much more profitable company.

With that, I'll turn it over to Marty Daley, who will give you a financial update. Marty?

Marty Daley

Thank you, Kay. In our motorized segment, sales were $194.7 million, a decrease of $49.5 million from the fourth quarter 2007. Gross margins of 6.07% decreased from fourth quarter margins of 11.65%, due to lower sales volumes, which did not cover fixed costs of operations, higher discounting, higher employee benefit costs, higher warranty costs, and higher material costs, as a percentage of sales, from the mix of products shifting to those with lower margins in this quarter. We do expect warranty cost to improve going forward. The increasing costs in first quarter was largely driven by an unusually large claim volume received in the quarter, which we feel occurred because dealers were much more prompt in processing their claims, as unit sales slowed on their lots.

We also expect the mix of products going forward will improve our material costs as a percentage of sales, although predicting model unit sales is very difficult in this market environment. Within our Towable operations, sales increased to $55.2 million from fourth quarter's $46.7 million. Gross margins declined compared to fourth quarter due to the impacts of higher discounts, higher employee benefit costs, increased warranty costs, and higher material costs as a percentage of sales from the mix of products shifting to those with higher material content in this quarter.

In our Resort segment, we closed on the sale of 11 lots for $2.4 million. There are now only 51 lots available to sell between the two completed projects, with a deposit on one lot. Since we are out of the selling season at these two resorts, we expect resort lot sales to begin picking up in third quarter, when the Bay Harbor, Michigan and Naples, Florida have lots developed and available to sell. Our sales in the Resort segment will continue to vary dramatically among our fiscal quarters, based on the seasonality of the resort projects we currently have for sale, and the locations we are currently developing.

Our consolidated SG&A was $28.6 million in the first quarter, only a slight increase from the $27.6 million in fourth quarter. The increase from fourth quarter related to increases in settlement expenses, stock-based compensation, and promotions, which more than offset decreases in franchise expenses, and elimination of management bonus accruals.

Looking forward in 2008 and the uncertainties in the general RV market, we are even more focused on the areas within our business that we can control. We have areas within indirect costs and SG&A that can be adjusted as our sales and production volumes decline. However, in periods of quick declines in sales, these costs are temporarily fixed. We are adjusting these costs, as well as accelerating other cost savings initiatives that were already underway which include savings in both variable and fixed costs.

With some of the immediate cost savings we are implementing this quarter, we anticipate reducing the level of loss we experienced in the first quarter and expect to be between $0.15 and $0.20 loss per share in the second quarter. Our goal by the end of 2008 is to be able to lower our breakeven point to quarterly sales in the $260 million to $270 million range depending on the mix. This will allow us more earnings potential when we begin to see improvements in the market.

On the balance sheet, total corporate borrowings were $59.2 million at the end of first quarter, compared to $29.1 million at the beginning of the year, due to the changes in our working capital accounts. Due to our decreased expected earnings for 2008, we anticipate non-compliance with certain debt covenants within our credit agreement. We have received a waiver for these covenants for the first quarter and are working with our bank group to amend the covenants on a go forward basis, to accommodate our revised business plan. Therefore, we have classified our long-term debt as current. This will be similar to the process in late 2006 when we amended the credit agreement.

Our accounts payable decreased by $14.4 million during the quarter to $68.4 million. Lower accounts payable levels are typical at period ends when we take a week off of production, as we did at year-end and at the end of first quarter, since we continued to pay down our accounts but do not receive inventory which would otherwise increase accounts payable. Likewise, when we dramatically reduce our production output during a quarter, we use material that was brought in earlier in the quarter, so although our material inventory reduced by quarter end, our accounts payable will be lower.

Our cash balance increased to $8.1 million from $6.2 million at the beginning of the quarter. Accounts receivable decreased by $15.6 million during the quarter to $72.6 million as a result of lower sales volumes and improved collections. Our overall inventory balance of $161 million was up $3 million from the beginning of the quarter. Raw material inventories increased by $1.1 million, while work in process inventory decreased by $400,000 and finished goods increased by $2.2 million to about $35 million.

Capital expenditures for first quarter was $637,000. We expect to spend less than $8 million on Capital expenditures in 2008. And with that, I'll turn this over to John.

John Nepute

Thanks, Marty. And as Kay and Marty have discussed, we were disappointed in the market conditions that we faced in the first quarter, as well as our results given those conditions. In 2007, our employees took a number of steps to positively position the company to give our shareholders better results, given the flat or even slightly lower market in 2008. We felt that we had finally gained ground on our capacity issues and indirect costs, and could operate profitably in spite of lower production output. Unfortunately, the decline in the first quarter of 2008 proved to be more dramatic than we were expecting, which in turn caused us to shed production throughout the quarter and to discount the units that we had built in order to encourage our dealers to take them. In this business, that's a recipe for disappointing results and that's what we got.

We'd like to say we see this most recent decline as something temporary, it's difficult to identify what dynamics in our core Class A market will change for the better prior to the elections in November. As a result, we are taking immediate steps to correct the situation. First of all, we'll once again be adjusting our production, so that our plant operations more closely match up with wholesale and retail demand. Secondly, we will be making additional reductions to our indirect and SG&A spending to better match our current levels of revenue. We've accomplished both of these tasks before, and we're confident our management team will make the necessary adjustments to our operations for the current market conditions.

Stat Surveys has reported retail sales of Class A units through February of this year, and they show the industry down 25% for the month, down 20% for the first two months. In terms of gas and diesel products, gas models were down 29% in February, and down 24% year-to-date through February. While diesel models were down 21% for the month and down 17% for the first two months. Diesels were 55% of the Class A market for the first two months of this year, compared to 53% for the same period last year. Stat Surveys reported that our market share rose in the first two months of the year to 17% of the overall Class A market. We continue to lead the diesel segment with 25% of that market and came in with an improved gas market share of 7.5%.

While we're still a minor player in the Class C market, which was down 21% through February, we remain extremely encouraged by our progress. We have increased our unit sales year-over-year by 24% in this category. Our market share is at 55% from 3% to 4.5% and we feel we currently have and are developing additional unique products in this segment, which will continue to help us grow our Class C business.

The overall Towable market was a bright spot down at comparatively modest 8.7% for the first two months, with travel trailers off 10% and fifth wheels down 6%. We have 4.5% and 2.5% of those markets respectively. Our Towable group has been doing a good job coming out with new, lower priced, lighter weight, travel trailer models and floor plans. In 2008, we'll attempt to duplicate this success and recapture some of the fifth wheel business we've lost over the last two years. The Towable market remains very competitive, but we have seen a nice uptick in our wholesale orders for this group over the last five or six weeks and we hope this is a signal that our products are doing well in the marketplace and that our dealers are comfortable with their inventory levels of our Towable protects.

Dealer inventories of our Class A products were up a modest 45 units in the first quarter. We believe dealers will continue to exercise caution in adding units on to their lots in the second quarter, even though we're running an assortment of retail incentives. If these are successful in combination with our reduced production output, we should see a significant decrease in our wholesale discounts quarter-over-quarter, despite (inaudible) changeover, we're currently going through. We continue to monitor the level of wholesale and retail discounts in the marketplace, and as you might imagine, there was a pick up in this activity in the first quarter. I'd expect incentives to remain higher in the marketplace for at least another quarter, while manufacturers clear their yards and adjust their production to the new demand levels. It's unfortunate that our current revenue level is masking the significant positive changes that we made to our business operations last year.

Our Management team really did a great job in 2007, consolidating and reorganizing our production and component facilities to be leaner and more efficient. Given the current market conditions, it's apparent they will need to do more. Unfortunately, we have a variety of additional initiatives on the drawing board that will be implemented throughout this year. Coupled with similar cost-cutting moves on the SG&A side, we're confident that we will see immediate improvement in our financial performance in the second quarter and further improvement as we move through the year.

As we embark on these latest changes, we remain convinced this is a product-driven market and we're committed to continuing to be at the forefront of product development in the RV marketplace. Additionally, we think both our dealer/partners and our mutual customers are finding value in the ancillary programs and services we provide and we will continue to develop and grow those programs. Despite the set back of the first quarter, all of the changes and improvements we've been making are strengthening our company for the long term and increasing our financial leverage when our core markets start to improve.

And with that, I'll turn it back over to Kay.

Kay Toolson

Thank you, John, and thank you, Marty. With that, we will open it up for questions that you may have. So Jason, I'll bring you back.

Question-and-Answer Session

Operator

(Operator instructions) We'll go first to Scott Stember at Sidoti & Company.

Scott Stember – Sidoti & Company

Good afternoon.

Kay Toolson

Good afternoon, Scott.

Scott Stember – Sidoti & Company

Could you talk about how much you paid for the new lots in outdoor resorts in Michigan and maybe just talk about what the investment is again for the three new lots that you have right now?

John Nepute

Right now, that is basically a piece of raw land that we closed on. We're in the process of constructing. We should have it substantially completed in August, at least for the first 65 lots or so. But, to your point about what the acquisition price was, it was around $2.5 million.

Scott Stember – Sidoti & Company

That was for Michigan?

John Nepute

Correct.

Scott Stember – Sidoti & Company

Okay, and capacity utilization, obviously must have been down this quarter and could you talk about some of the steps that you're taking, whether it's days or weeks off to bring your production levels down?

Marty Daley

Yes, I think part of what we were looking at there, we were closer to around 50% utilization, with the actual run rates per day. But, as we mentioned, kind of the effective production output would have put efficiencies down in the 43% to 45% range in motorized and with that, to achieve that in first quarter, we took off two complete weeks and we had some other -- we only work four-day weeks to get to that production output. So we're doing a combination of things this quarter, which would be similar to that where we'll take some days off, but then also adjust some of the run rates, so that we're in sync with the output.

Scott Stember – Sidoti & Company

Okay, and on the Towable side, you said you've seen strengthening in orders over the last five to six weeks. You mentioned that part of it could be just new product introductions. Do you think some of it has to do industry-wide phenomenon, or is it just company specific?

John Nepute

I'm not sure. It's been fairly steady in terms of our order picture. We haven't adjusted our run rates really at this point, although there's a potential if it will hold for a few more weeks, that we could in fact raise our Towable production rates just a bit. We would like to think that, yes, it's impacting the overall market. I'd like to think I'm rising with everyone else, as opposed to being the lone person out there.

Scott Stember – Sidoti & Company

Now, could you just talk about the strength whether this is on the higher end fifth wheel, or travel trailers, or is this across-the-board?

John Nepute

It's mostly travel trailers.

Scott Stember – Sidoti & Company

Okay. And just last question. Could you touch on the expected tripping of your debt covenants, and just remind us how those are formulated, and what steps we should look for?

Marty Daley

What happens on that is, there's a leverage ratio that's based on a trailing 12-month EBITDA calculation compared to our debt level and obviously in a quarter like this, where we have negative EBITDA, then basically you go back and you drop off the quarter last year that had positive EBITDA, and so you end up with quite a shift in your trailing 12 months. So as I mentioned in my comments, that we do have a waiver from the bank group on our non-compliance with the first quarter and calculation on that, and then we are working with the bank group to put a revised business plan together, so we can lay out the parameters on where we need to go in terms of debt covenants to make sure that we can have a facility in place that will work for us, both in terms of the needs that we have for working capital and in terms of being able to make sure we can meet the covenants that are set in place.

Scott Stember – Sidoti & Company

All right. That's all I have. Thank you.

Marty Daley

Sure.

Operator

Thank you. We'll go next to Greg Badishkanian with Citigroup.

Greg Badishkanian – Citigroup

Great, thank you. Two questions for you. First is with respect to the promotional environment, I believe you mentioned that, likely we'll see another quarter or so of higher promotions. Have you seen your competitors cutting production already, or do you expect them to? What's your thought on sort of the capacity within the industry as a whole?

John Nepute

I think most of the manufacturers that we're aware of have been cutting production either by lowering their run rates or by taking additional days, or in some cases weeks off, and I'm guessing that may continue for a while, although just like us, I'm assuming that they're all trying to get to where they're running five days a week, so their hourly people can get a full week's paycheck.

Kay Toolson

As you're aware, we've had three motor home manufacturing companies that have ceased business in the quarter, National RV, Travel Supreme and Western Recreation that produced Alpine Motor Homes, so we have lost some capacity in the industry by three companies going out of business.

Greg Badishkanian – Citigroup

Good. And with respect to Towables versus motor homes, just kind of categorizing the promotional environment there, and you mentioned a quarter or so, just how long you think that's going to continue, and also are there any -- is it any specific companies that are – is it specific companies that are heavily discounting, or is it just kind of widespread, and everyone is kind of just discounting, giving promotions to stimulate sales?

John Nepute

I don't know that I'd want to categorize it as everybody. What I would say is, it's not untypical at this point in the year to see discounting, just because most people are changing over from, in this case, 2008 models to 2009 models, so you always see a little bit of discounting and it varies depending on how many of those models a particular manufacturer may be trying to move and then of course, in this particular year, it's being exacerbated by the fact that the market is kind of falling away from everybody at the same time.

Greg Badishkanian – Citigroup

Great. Good, and that is helpful. And last question, just what do you think the – when you look at the potential for your Class C on the Sprinter Chassis and the Super C for you, what do you see as like the potential over the next 12 months or so for that?

Kay Toolson

Well, we have a good supply of chassis. We have about just under 300 chassis on the ground here now and we have a supply coming in, so we're going to build out the first run of them. We think we've done a great design on the product and we're real excited about getting it out to the dealers. Our prototypes are just starting to be finished now and we will go into full production in June and the market is really hard to pinpoint exactly what the market is because Class C's aren't segmented that way in the reporting structure, but we know it's a sizeable market that's been very successful for some companies, and so we expect we'll take a good piece of that.

Greg Badishkanian – Citigroup

Great. Thank you.

Operator

Thank you. We'll now take a question from Kathryn Thompson with Avondale Partners.

Kathryn Thompson – Avondale Partners

Hi, thanks. Not to beat a dead horse on the discounting and promotional environment, but we have noted that you've gained some market share over the most recent data from Stat Survey and we wanted to get a sense from you, how much of your increase in gas and see it if it has been in part due to more aggressive promotional environment for you and I guess just as a side comment based on our dealer survey, we understand that there definitely is a certain amount of seasonal discounting going on, but it didn't seem like there had been unusual discounting, and perhaps this is something that has picked up more recently, if you could talk more specifically about the timing of the discounting, I'd appreciate it.

John Nepute

Sure. What I would say is, first of all, on the gas side of our business and the Bs and Cs that we produce and retail, we've got very little activity in terms of discounting on those models. The Cs particularly are doing very well standing on their own. Where we did see, at least on our part, more discounting than maybe we would have normally seen was in the middle to low part of the diesel market. That's where we have a lot of production and that is where we kind of had a hard time trying to ratchet things down, as the market fell away from us.

Kathryn Thompson – Avondale Partners

So the market there was actually weaker actually in the quarter?

John Nepute

Right.

Kathryn Thompson – Avondale Partners

So it's not your opinion that your increase in market share in Cs, or in gas is from –

John Nepute

No, I don't think we're buying that market, no.

Kathryn Thompson – Avondale Partners

And what gives you confidence that you'll be able to lower your warranty costs sequentially, if you could just give a little bit more color on that?

Marty Daley

Yes, I tried to explain a little bit on that, and it's because of the volume of the claims that came in, that because of the way we calculate our warranty accrual and what needs to be there. Currently, it's not giving effects to the changes in the claims volume from quarter-to-quarter, and because of that, as we've seen in the past like this quarter and other quarters that have unusually large volumes that come in on claims that impacts my warranty accrual, and then I have to make an adjustment to increase that warranty accrual back up, which increases my expense in that quarter. So as –

Kathryn Thompson – Avondale Partners

Yes, I understand that but I guess why – I guess kind of backing up, why was there an unusual influx?

Marty Daley

That's what I tried to explain to you that I think in the first quarter as dealerships had sales decreasing on their unit sales on their lots, they look for other sources of cash flow in their businesses and certainly if they are more prompt in getting their warranty claims in to get those paid sooner, then that's a source of cash for them.

Kathryn Thompson – Avondale Partners

Okay.

Marty Daley

So it looked like to us that they had accelerated some of those requests that normally would have been spread out over the next quarter, for example.

Kathryn Thompson – Avondale Partners

Okay. What is your capacity utilization right now versus quarter end?

Marty Daley

I guess the effect is pretty similar. We're not expecting to produce a whole lot more units this quarter than we did last quarter. In fact, we may notch that back slightly to be able to reduce some of our finished goods inventory.

Kathryn Thompson – Avondale Partners

And could you remind me what capacity utilization was within the quarter?

Marty Daley

It was 57% on motorized, based on the actual run rates. However, because of your actual output, when we take days and weeks off, probably the effective was closer to 45% or so.

Kathryn Thompson – Avondale Partners

Okay. I guess my final question is why Michigan for an RV resort, particularly in light of what's going on in the economy up there?

John Nepute

There's a couple of things we looked at for picking Michigan. One of them was they were trying to find a northern location, Marty talked a little bit about the seasonality of our resort properties. We want some balance on our resorts, so we looked to northern locations and actually around the Bay Harbor, Petoskey, Charlevoix, Harbor Springs area. There's a high concentration of high end second homes; it's a very popular resort location. But there's not really anything that's servicing the motor home industry, so it gave us an opportunity to find a location that kind of fit the bill.

Kathryn Thompson – Avondale Partners

Okay. All right, thank you very much.

Operator

Thank you. We'll now go to Ed Aaron with RBC Capital Markets.

Ed Aaron – RBC Capital Markets

Thank you. A few questions for you. First, I apologize if I missed this, but to you give your sales estimate for the second quarter in dollars?

Marty Daley

No, I don't think we gave that number. I think probably what we're thinking is that we may have some slight increase from first quarter just based on the seasonality of things where we typically would have a few more sales as we go into the springtime. That obviously is the caveat. With this current environment, it is difficult to forecast sales.

Ed Aaron – RBC Capital Markets

Fair enough, thank you. And then just with the covenant issue on your debt, can you give us some sense of your thinking at this point about what your cost of debt might look like, if you need to come to new terms with your lenders?

Marty Daley

Yes, and actually just a function of the pricing grid that we have within our agreement. We're moving incrementally on raising some of our rates because the spread changes as compared to LIBOR, so we maybe able to around 5.5% or 6%.

Ed Aaron – RBC Capital Markets

You think you'll be able to borrow at 5.5% to 6%?

Marty Daley

Yes, currently based on the grid that we've got and where that would move to, on the upper end of the grid for the borrowings compared to LIBOR, that's probably where we'd go to.

Ed Aaron – RBC Capital Markets

Okay. And then I just wanted to ask a couple of clarification questions on some of the disclosures in your release. I asked about this last quarter, but I'm still a little bit fuzzy on it. You've been disclosing the number of dealers every quarter for both motorized and Towables, and the motorized dealer number was up to I think about 348 this quarter and that's over 50% more than it was when you started reporting that data, I think in the second quarter of last year, and it's up 22% since the end of '07. Can you just shed a little light on what's driving that, and then the flip side of that is, that the Towables look like they're going the opposite direction, looks like 602 versus 668 at the end of the fourth quarter.

Marty Daley

The first quarter we reported, we didn't include the Canadian dealers, so we've added all of our Canadian dealers and we're also reporting the motorized as independent distribution lots, so that if a dealer, one dealer has seven lots, we'll count each lot as a distribution point.

Ed Aaron – RBC Capital Markets

And when was that change made for reporting purposes, so like would that explain some of the move from December '07 to March '08?

Marty Daley

What did we have – I think that would explain definitely the move from the original, when we came out with the lower numbers, Ed.

Ed Aaron – RBC Capital Markets

Okay.

Marty Daley

And then on the Towable side, we are just going every Towable dealer as an individual dealer, and that's one of the reasons, instead of the independent distribution lots, we've got each dealer registered one-time.

Ed Aaron – RBC Capital Markets

Okay. So and then to the extent that that number is lower than it was in the fourth quarter, that's just maybe some dealer attrition in a soft market?

Marty Daley

Yes.

Ed Aaron – RBC Capital Markets

Okay, thank you. And then just finally, the motor home dealer inventory, I've been trying to back into a year-over-year change and the number I'm getting to, is that dealer inventories are up about 300 units in I think total motor homes compared to the same time last year, which would be about a 9% increase. Does that sound right to you?

John Nepute

I think in terms of – we were just talking about that this morning. I think the quarter-end number that we give you is probably a little misleading in that because of particularly the last -- this last quarter and to some extent in the fourth quarter, the shipments of units were skewed to the last few weeks of the quarter, and so a lot of those units that we're showing in dealer inventory, probably were on their way to a dealer, or maybe had just got to the dealer lot and so they 're a little overstated, I think. I don't know that really our inventories have changed all that much, year-over-year. It seems like pretty flat.

Ed Aaron – RBC Capital Markets

Okay. Thanks for taking my questions.

John Nepute

You bet.

Marty Daley

Sure.

Operator

We'll go next to Mike Roarke with McAdams Wright Regan.

Mike Roarke – McAdams Wright Regan

Hi, good afternoon.

John Nepute

Good afternoon.

Mike Roarke – McAdams Wright Regan

Marty, on the debt to EBITDA ratio that you were talking about, what is the break point? What is the ratio of where you have to get into discussions?

Marty Daley

Well, it's -- 2.5 is where it's at, so anything above 2.5:1, then we need to get into discussions with the banks on that.

Mike Roarke – McAdams Wright Regan

Okay.

Marty Daley

The last go around for example, just to give you some shedding some light on that, we had in the end of 2006 when we amended, we had changed that to go to a 4:1 that allowed us and it ratcheted down each quarter from that, as we worked through our business plan to bring that down. Not saying that's kind of the schedule we're going to come up with, but it kind of shows you the differences that we can put together in terms of working with the covenants on our agreement.

Mike Roarke – McAdams Wright Regan

Okay and when do you expect to have that issue fully resolved? Is it imminent? Is it next few months?

Marty Daley

It would be within this next quarter.

Mike Roarke – McAdams Wright Regan

Okay. Are you guys going to cut the dividend?

John Nepute

We have no plans to right now.

Mike Roarke – McAdams Wright Regan

Okay. And then I can have just a bigger picture question too. Do you feel that there is, with oil prices, fuel prices, what not, where they are, do you feel that there is a structural shift taking place within the industry, because in your prepared remarks, you were very confident that the market is going to come back, so I'm trying to get a sense of what gives you that level of confidence?

Kay Toolson

I've been in the industry longer than anybody in the room here, so I can probably take a stab at that. We've been through some of these cycles before in '73. We had gas lines, and rationing of gas in '78, and the market come back incredibly strong after that, the same after the recession in early '90s, and you know what, we've never had the same exact circumstances that we're facing in the marketplace right now. I think all industries and everybody is trying to understand exactly where the market is going with the commodity pricing doing what they're doing with the – we've never had a financial crisis as we're facing right now, with the banking industry. So we're just going by the number of baby boomers entering our market, there's a pent-up demand for RVs. The surveys have been done by University of Michigan and others, and the number of people who are planning to buy an RV, when they get close to retirement age continues to grow. I think people have put off their buying decision based on current economic conditions, both in the credit markets and fuel prices, but I'm not sure or we don't expect that they will totally vacate that market, so we do expect once there's some stabilization in our economy, once the credit markets get back to more normal, and once fuel ends up being some number that is going to end up at and doesn't keep being this massive moving target, that there will be some normality back in the industry and it's just by historic, what's happened, and what we think is going to happen.

Mike Roarke – McAdams Wright Regan

Okay. Great. Thank you for taking the questions.

Operator

We'll go next to Craig Kennison with Robert W. Baird.

Craig Kennison – Robert W. Baird

Good morning, everyone.

John Nepute

Hi, Craig.

Craig Kennison – Robert W. Baird

Thanks for taking the call here. The first question has to do with the outdoor resort segment. Historically, that's been very profitable for you, but given the change in the real estate market and your own debt covenant issue, why does that investment make sense today and why wouldn't you maybe consider reigning in those investments just to protect the core franchise?

Kay Toolson

We are actually looking at that. We've made a decision to delay the resort in LaQuinta, which is our biggest investment. We're doing smaller investments, both Naples and the one in Bay Harbor, Michigan are smaller resorts, so they aren't as cash intensive, and we think that they're also not, we don't think, we know that they're also quicker to turn, and quicker to complete, so it is a shorter time frame for our cash being tied up, and that's going to be the model we're going to look at. Obviously, if the market continues to deteriorate, we'll be more guarded in where we invest our money for our returns. But, right now, we still expect that to be an important part of our business.

Craig Kennison – Robert W. Baird

Thanks and then with respect to finished goods inventory, you addressed part of this, but it's up significantly. What would your target be for the end of Q2 and maybe the end of the year, and is that rise in finished goods inventory having an impact on your promotional environment?

Marty Daley

Actually, our finished goods inventory incrementally from last quarter is only up slightly, so we're at about 35 million, I believe I said. And with that, obviously in these kinds of periods where we're looking at invested capital in the business, we'd like to bring that down, and we'd like to over the course of this quarter bring that down by $7 million to $10 million possibly even. That's getting to a pretty low level for us in terms of finished goods level, but certainly something that we are trying to achieve.

Craig Kennison – Robert W. Baird

And then with respect to your SG&A expenditure, what would be a reasonable run rate for that line item going forward?

Marty Daley

I guess here initially, with some of the changes that we've made and are making, probably closer to $26 million a quarter.

Craig Kennison – Robert W. Baird

Okay, that's helpful. And then lastly, given the way or the difference in how the market currently values your business and how maybe a strategic buyer might look at it, have you or the Board received any inquiries from any other players in the market that might have an interest in your business and if you have or haven't, how would you look at such an inquiry? Thanks.

Kay Toolson

Well, that's a fair question. We are certainly at our current trading price; we're trading at under our net book value, so being a – our Board is certainly something that we would discuss. We have not had any firm offers of anybody trying to acquire us, but our Board would certainly look at anything that would be in the best interest of our shareholders, which is what we would all do.

Operator

We'll go next to John Diffendal with BB &T Capital Markets.

John Diffendal – BB&T Capital Markets

Yes, good morning. Marty, I just want to see if you can give us some sort of break down in the decline in the motorized margin. I guess it fell off about 5.5 points from Q4 as you described it. Any way to break that decline down between volume, the warranty situation, and the discounting situation?

Marty Daley

The largest contributor was the volume change and of course, the volume change is somewhat combined with what has to happen on the discount side of things, so between those two, that was the largest portion of the change there, and then to a lesser extent, then it came down to the material mix shift of the products that had the higher material content, and then the warranty would have been the lowest one out of that group; lowest of all of those you listed.

John Diffendal – BB&T Capital Markets

And last question, what are you hearing from lenders on the retail side in terms of economy has been tightening up and credit has been tightening up? Anything you're hearing in terms of either dealers telling you that there's any change in the way retail lenders are approaching the market, or their performance of their portfolio right now?

Marty Daley

I think we have seen a deterioration in the lenders that we've talked to and their credit portfolios, and as they look to increase the spread there, John, they may be tightening up some of their credit parameters and how they underwrite these loans, and I think that we're also affected by the other consumer lending dynamics in the marketplace, where some of the home equity. Withdrawal lending is a little bit tougher for the consumers to obtain as well, so I do think we're seeing some deterioration and toughening in credit policies in our markets.

Operator

We'll go next to Barry Vogel with Barry Vogel & Associates.

Barry Vogel – Barry Vogel & Associates

A lot of my questions have been answered, but looking at this thing objectively, in terms of gasoline and diesel prices, Kay, since you and I know each other, or since you have been in the business, you've never seen anything like this in terms of the rise in gasoline and diesel costs. So the question I have here, and I know you've said before that the industry always tends to come back, what if, and this is not implausible, that gasoline and diesel costs continue to rise, number one? Number two, what if this economic downturn which some people think is a recession, some people don't think so, but that's just a name, what if we have a very serious economic decline from here, let's say over the next year, let's say the lending standards which were discussed in the last question continue to tighten, how do you cope with that without possibly getting into trouble financially based on the fact that you owe money and you have these covenants?

Kay Toolson

Barry, we certainly have a very strong balance sheet and we have the ability to withstand the market that we're in right now, and be able to make it work. We certainly have contingency plans in place, should the market deteriorate any worse, or any more, that we would idle a plant, or we would do more draconian consolidations. That's just something, it's hard to predict because we've never seen the exact set of circumstances that are in place right now, and so we're monitoring it daily and weekly and monthly, and we're trying to adjust our business plan to fit that. It's certainly declined more than we expected it to and we're having to make some very difficult decisions and tough adjustments to react to that, and we will certainly, if it declines any more or stays like this longer, we'll make those tough decisions. That's why we've been successful for the 20 years we've been in business and we expect to continue to be successful.

Barry Vogel – Barry Vogel & Associates

So having said that, I understand exactly what you're saying, but instead of reacting, how about being proactive before these things possibly happen. Reacting may not be the thing to do because reacting is almost after the fact.

Kay Toolson

That's a good point, Barry, and we have been proactive in many of the things we've done and I think you can be both proactive and reactive in how you're approaching it and I guess I just – none of us know exactly what the market is going to be. We are proactively making changes to our business right now, and over this week, and the next couple of weeks, to lower our cost and lower our breakeven point, and if we have to take further steps to lower it even more, we will. But we're doing – we are being proactive and we're reacting to the market that we're participating in.

Barry Vogel – Barry Vogel & Associates

I have a question for Marty. Your short-term debt of $27 million on the balance sheet, given your conversations with your lenders and all your covenants and stuff, does that thing ever have to be paid? In other words, it said short-term debt. What are the terms of payment to your lenders if they want to get paid?

Marty Daley

That's a revolving debt, so that just continues until the end of the term of the agreement, which is currently the end of 2009.

Barry Vogel – Barry Vogel & Associates

Okay, so you're saying that at the end of 2009, based on your current agreement, you would have to pay that off?

Marty Daley

Right. If we still have a balance at that point, we would get refinancing if we needed to borrow money.

Barry Vogel – Barry Vogel & Associates

Okay.

Marty Daley

And of course, that's all contingent on the covenants and things like that.

Barry Vogel – Barry Vogel & Associates

Yes and I have one more point about the Michigan question that someone raised. In times like this, one would think that that would be an easy thing to do, not to put more money into lots, just delay that, until things improve, and I was a little surprised also that you're going into Michigan, because you would think that of all of the places in the country that's not the most optimum in theory. People aren't necessarily flocking to Michigan compared to other parts of the country. Do you think you might, under the circumstances if they don't improve, cease putting more money into the resort segment?

John Nepute

We're certainly -- we always evaluate what the market holds out there and it's no secret that Michigan obviously has been pretty hard hit on the real estate side of things. However, as I said earlier, in that particular area of Michigan, that's not an area that is as subject to what happens in the Greater Michigan market. You have a lot of outside money that goes into that area, which is what's driving the valuations and the popularity of that location. So we will go into that with, using our best judgment, we're going to build these out in smaller pieces, so that we don't expose ourselves to a larger loss potentially, in the event of continued downturn.

Barry Vogel – Barry Vogel & Associates

Thank you very much.

John Nepute

Yes.

Operator

We'll go next to Frank Magdlen with The Robins Group.

Frank Magdlen – The Robins Group

Good afternoon. Marty, you talked about bringing the company to being say, breakeven at the $260 million to $270 million range. Does that entail any material change in your productive capacity?

Marty Daley

Actually that doesn't anticipate some of the other changes that we could still make within production, in terms of some of the larger consolidations that we could do. It does anticipate some smaller consolidations of some component facilities, but even there, there's still other component facilities that could be consolidated to drive that down even further and those are things that are on the discussion standpoint right now, and we're trying to evaluate how quickly we could make some of those kind of changes out there. And actually, with what our goal is, I think in my comments I talked about the $260 million to $270 million, I think our goal really is to try and get it down to where it's around $250 million breakeven by the end of the year. So with some of those other sub assembly components that we're working on, consolidating, and what we've already got on the slate for reductions over the next several weeks here, that those, that we could certainly get to a level like that if sales hold up for us.

Frank Magdlen – The Robins Group

All right. And then the bank debt, when does it peak? How much additional funds do you need, do you think to build out the resorts and working capital needs?

John Nepute

That's a timing event obviously, is what you really plan to do is, as you have one resort that's being built, you're selling through those other resorts, and that's kind of where we're at right now. We'll probably have about an additional $4 million to $6 million infusion over the next quarter or two on these two resorts that we're currently building on. We should start to see then a flip on that on the sales side of things as we go into the third and fourth quarter, where we get back hopefully $5 million to $6 million of that.

Marty Daley

And then part of what we're looking at cash flow as I mentioned on our accounts payable in particular, we expect that, that normalizes, that will actually come up from the levels at the end of the quarter, so we'll offset some of those cash needs that we have on the resort side as well.

Frank Magdlen – The Robins Group

So you're trying to tell me we're close to your peak borrowings?

Marty Daley

At the end of the quarter, yes.

Frank Magdlen – The Robins Group

Okay. And were there any shares bought back in the quarter?

Marty Daley

Just the ones we talked about at the very beginning of the year. We mentioned them on our call at the end of the fourth quarter, so it was the first couple weeks or something of January that we bought them. It was about $3 million.

Frank Magdlen – The Robins Group

Do you remember about how many shares?

Marty Daley

It was at $9 a share.

Frank Magdlen – The Robins Group

Okay. All right, thank you.

Marty Daley

Sure.

Operator

Thank you. In the interest of time we do ask that you please limit yourself to one question and one follow-up. We'll take our next question from Bob Simonson with William Blair.

Bob Simonson – William Blair

Good morning. Marty, on the tax rate, you effectively had a credit rate of about 36%, 37%, without predicting that you'll have a loss for this year. Is that the kind of number that we should use in modeling to reduce any pre-tax losses that we estimate? And secondly, on the cash, does the pre-tax part come over your cash flow, or do you bring it over as it has been credited with the tax credit?

Marty Daley

Let me answer the last half of that first. With the tax credit side of things, we would get that back at the end of the year, when we file our tax return, to be able to go back and apply that loss, and carry it back to – like last year when we had profitability, so we can get that money back at that point in time. On your first part of the question, in terms of the rate itself, for a range of loss area, yes, around that 36% to 36.5% benefit, is probably a good rate to use, although as we approach breakeven it gets kind of strange on the actual tax rate. And likewise, in terms of if you go to a profitability quarter and we're not saying that it's going to be at a 36% rate at that point, but when we switch over to profitability, it will probably go back to more like the 39% rate as you're on that side of the equation.

Bob Simonson – William Blair

And then just for modeling purposes however many quarters at a loss in plus a profit, the rate would be a melted rate?

Marty Daley

Right.

Bob Simonson – William Blair

Okay. And one quickie. Have you seen, or can you tell how much inventory is floating around from the three companies that are no longer in the industry?

Kay Toolson

There's a good number. The National is a good number of them have been sold down, some dealers still do have more than they'd like for sure, and the other two players were not that big of players and they mostly participate in the higher end part of the market, so actually it's good for us that they've gone away. But I would guess their inventories, dealers start feeling the – when they start hitting their drug out on their warranty payments and things like that, they start getting somewhat concerned and so they started weaning them back before, which is what then starts really pushing the companies down.

Bob Simonson – William Blair

Got it. Thank you very much.

Operator

We'll now take our final question from Juan Gomez with BB&T Capital Markets.

Juan Gomez – BB&T Capital Markets

One quick last question. Can you give us the internal retail registrations for the travel trailers and fifth wheels for this quarter and quarter a year ago?

Marty Daley

We were giving that number and it just didn't look to us like it was really an accurate number. For some reason, the Towable customers just aren't submitting registrations and I would just look at the Stat Survey's numbers. They're the best gauge we've got we feel, and so that's why we discontinued giving that number out.

Juan Gomez – BB&T Capital Markets

Okay, all right. But one for the motor homes, that's pretty accurate you would say?

Marty Daley

Yes.

Juan Gomez – BB&T Capital Markets

Okay. All right, thank you very much.

Marty Daley

Thank you.

Operator

That does conclude today's question and answer session. At this time, I'd like to turn the conference back over to Mr. Toolson for any closing or additional remarks.

Kay Toolson

Thank you again, Jason, and thank you all for participating in our call, and we look forward to better information on our next conference call which will be in July. Thank you very much.

Operator

This does conclude today's teleconference. You may now disconnect and have a nice day.

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