Monaco Coach Corporation Q2 2008 Earnings Call Transcript

Monaco Coach Corporation (MNC)

Q2 2008 Earnings Call

July 30, 2008 2:00 pm ET

Executives

Kay Toolson - Chairman and Chief Executive Officer

Marty Daley - Chief Financial Officer

John Nepute - President

Analysts

Kathryn Thompson - Avondale Partners, LLC

Edward Aaron - RBC Capital Markets

John Diffendal - BB&T Capital Market

Analyst for Craig Kennison - Robert W. Baird & Co.

Barry Vogel - Barry Vogel & Associates

Bob Simonson - William Blair & Company, LLC

Peter Horn - Gates Capital

Presentation

Operator

Welcome to the Monaco Coach second quarter conference call. (Operator Instructions)

Before we begin, please allow me to read the following Safe Harbor Statement. Certain statements made during the course of this conference may be forward-looking. These statements are based on current information and expectations, 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 will now turn the call over to Kay Toolson, Chairman and CEO.

Kay Toolson

I would like to welcome all of you to our second quarter conference call to discuss both our financial results and 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.

It will be an understatement to say that it has been a challenging market during the last few years and in particular, the last several months. I have been in the RV industry for over 30 years and have only seen the market fall this dramatically one other time, 1979 and 1980. As it was the case back then, I am expecting that we will consume this difficult period both our Company and industry and be able to strongly participate in a resurging market that will occur.

Our being as a lifestyle choice and certainly a great phenomenon in America is one that will not go away. I feel strongly that our politicians and elective officials will eventually come to the conclusion that we need to focus on making our country more energy independent, that they will then be able to focus once again on turning our economy around. We expect that once we see the lexes behind this and we see some stability in the direction of our country, that the RV market will comeback stronger than ever.

However, in the meantime, we have taken some very drastic measure in order to properly seize our Company to be able to be profitable at a substantially lower production and sales rates. Though painful, we made a very difficult decision to close some of our major manufacturing facilities in Northern Indiana. It was necessary for us to take very decisive steps to make sure we could be profitable at these much lower rates. Our goal is to substantially lower a breakeven point to approximately a $175 million per quarter.

With the reductions and restructuring we have both completed and recently announced, we have accomplished this task. While we are focus on making the necessary changes to reduce our footprints and our breakeven point, we are still focused on improving our products. We are also redoubling our efforts to come out with new more fuel efficient, lighter weight products both on the towable and motorized side of our business.

We are convinced that while there will always be a significant market for the larger current Class A motor coaches and RVs that have traditionally been built in the past. There will be a strong market demand for new lighter-weight, more fuel-efficient products in the future. It is our intention to be on the forefront of leading this new market.

With that, I will turn it over to Marty Daley, our Chief Financial Officer.

Marty Daley

In regard to our credit facilities, our current bank group has been supportive of our business plan by granting a Waiver of Covenants for the second quarter which will allow us time to get a new asset base lending arrangement in place. Bank of America will be the administrative agent of our new arrangement which will be at three year $100 million senior credit facility. Our signed commitment letter with Bank of America for the facility is subject to a number of conditions and the negotiation and execution of a definitive credit agreement.

One of the conditions requires $40 million of opening availability under the senior credit facility. In order to meet this requirement, we are seeking approximately $30 million to $40 million in subordinated debt financing. The senior credit facility utilizes accounts receivable and inventories as suborning days and will subordinate its lane in other non-working capital assets to the provider of subordinated debt.

Bank of American has also been working with us to obtain subordinated debt financing. A portion of the additional financing we are seeking could come from project loans in the resort segment of our business. We have had lenders expressed interest in this type of financing which could provide up to $10 million in project loans.

In regard to our restructuring, as we mentioned in our press release, once the restructuring is completed, we expect savings of more than $12 million per quarter. Most of these cost savings come from indirect cost in our Indiana plants that are duplicated in our Oregon operations. As we move the products built on a two motorized lines in Indiana and combine them with a two lines in Oregon, we will not need to ask significantly to our indirect cost structure in Oregon.

In addition, due to the drop in wholesale demand which has resulted in our reduced production schedule, once we have combined production in Oregon, we will be able to produce the expected wholesale demand not only nominal increases in current production workforce. Another benefit of our restructuring will be the cash flow generated from reducing inventories as we combine four motorized production lines to two lines, we anticipate reducing our material and work comprises inventories by about $35 million.

Looking at our capacity utilization, based on our run rate per day, we rate 47% on motorized and 50% on towables at the end of the second quarter. However, considering the days of production taken off during the second quarter including regularly scheduled shutdowns and holidays, our effective capacity utilization was just under 40% for both motorized and towables.

With the restructuring, we are removing half of our Class A motorized capacity. In general, our restructuring plan is intended to reduce our capital requirements and lower our breakeven point. Therefore, our plan includes target reductions in spending in the SG&A categories as well as indirect cost I have mentioned. Our overall target would result in breakeven at about $175 million in sales per quarter.

This target assumes a certain mix of product sold as well as stabilization of the pricing environment which would return discounting to normal levels and also assumes claim volumes for a warranty and settlement cost return to historical levels when compared to our current quarter sales volumes. Our total corporate borrowings were $80 million at the end of second quarter compared to $59.2 million at the beginning of the quarter and our cash balance decreased from $8 million to $1.3 million during the quarter.

These changes were due mainly to the increase in finished goods inventory. Our accounts payable increase by $8.6 million during the quarter to $77 million. Accounts receivable decreased by $3.5 million during the quarter to $69.1 million as a result of lower sales volumes. Our overall inventory balance of $178.3 million was up $17 million from the beginning of the quarter; raw material inventories increased by $500,000 while working process inventory decreased $3 million and finished goods increased by $19.7 million to about $55 million.

Capital expenditures for the first six months were $1.6 million. We expect to spend $5 million on capital expenditures in 2008 which is closer to maintenance CapEx level.

And with that, I will turn this over to John.

John Nepute

As Kay and Marty have talked about that the first quarter of 2008 was lean, the last two months of this year's second quarter took the market down to a whole new level. The Class A retail down 31% for the year and wholesale activity down in excess of 50% in both May and June. We once again found ourselves slowing down production while at the same time, trying to entice dealers and retail customers to purchase units with the wide variety of promotional incentives and as with the first quarter, we found it very difficult to operate profitability given those dynamics.

And as despite eliminating 600 jobs in April and reducing or eliminating many other expenses as well, manufacture in the 1400 employee reduction that we announced two weeks ago, we will have reduced our employee headcount by fully 40% since the end of the first quarter. I severely believe this is unfortunately a kind of action we need to right size the Company for today's market conditions. While we are happy to see the recent decline in oil prices, it is our belief base on current conditions that dealers are most likely continue to try and reduce their inventories in the third quarter and perhaps support as well.

Marty has talked about the savings we will be getting by moving to one main campus and certainly, those are considerable from the administrative and operational standpoint, it also will help reduce the complexity of our business model which has become increasingly important as we have eliminated many management and administrative positions the last few months.

This certainly sets the stage for us to be successful at lower revenue levels, a big driver of that will be the improved capacity utilization. In our press release announcing the reductions a few ago, we said we are reducing our Class A motorized capacity by 50% to approximately 90 units per week. To give an example of what this means going forward in terms of operating leverage, let us look ahead to this year's fourth quarter.

Taking last year's Class A whole side activity in the fourth quarter and factoring in a 40% decline, we still expect to be operating in a capacity utilization rate of 75% for Class A units in this year's fourth quarter. Now, it seems like most analysts and investors are keeping up with the market stock these days but for the benefit of those who are not receiving them, I will quickly run through the retail numbers.

Stat Surveys as reported retail sales of Class A units through May of this year and it shows Class A is down 43% for the month and down 31% for the first five months. In terms of gas and diesel products, gas models were down 41% in May and down 32% year-to-date through May. Our diesel models were down 45% for the month and down 30% for the first five months. Diesels were 52% of the Class A market for the first five months of this year which is the same percentage as last year.

Stat Surveys reported there are market share rose in the first five months of this year to 17.4% of the overall Class A market. We continue to leave the diesel statement with 26% of that market that came in with an improve gas market share of 8.1%. I think it is known already that we were the number one manufacturer in terms of all Class A retail sales in both April and May for the Stat Surveys data.

Although we restore minor player in the Class C market which was down 21% through May, we remain encouraged by our progress. This year we have gained market share in this category and are hopeful that our Class C's printer models which we introduced at the end of June will help increase our share in this market even more. The overall Towable market which have in the bright spot compared to the motorized side of the business had shown some weakening the last couple of months.

The Towable market was down 23% in May and down 18% year-to-date. To the first five months, fifth wheels were down 15% while travel trailers were down 20%. Our share of this market is 4.3% and 2.5% respectively. The Towable market has always been a competitive market but we have seen a tightening in the last couple of months and it appears to be a very price sensitive. We continue to believe lower price, lighter-weight units will continue to dominate this market for some time and our focus is and has been continuing to introduce more these types of products both in the travel trailer and fifth wheel categories.

Dealer inventories of our Class A products decline by approximately 225 units in the second quarter and were down a 170 units for the first half of the year. Dealers are continuing to exercise caution and adding units under their lots and we expect to continue to see that throughout the third quarter and perhaps the fourth quarter as well. Part of our success in lowering our finish goods inventories and reducing our discounts in the second half of the year will depend on this doing a better job of engaging our dealer's interest in replacing retail units on their lots.

However, perhaps an even larger part will be depending on the consolidation of our motorized lines from four to two which will give us much greater flexibility and scheduling than we had in the first six months. If we are able to hit the right combination of volume and mix in the fourth quarter, we should see a significant decline in both our finish goods inventory as well as our discounting and promotional expenses. Speaking of wholesale and retail discounts in the marketplace, as you might imagine, we did see a pickup in this activity in the second quarter, we have not seen much change in this category in the third quarter.

We are hopeful that other manufacturers suggest a new levels of retail activity just as we are adjusting and we will see a return to more normal levels for factory incentives in the fourth quarter, if not before. It is unfortunate that our currently revenue level is masking the significant changes that we have made in our making to our business model this year. The management team and our employees have all been asked to do more with less to their credit, they have responded and have in our doing what needs to be done.

We remain committed to seeing this process through and coming out the other side of the market with a lean, efficient and profitable organization and we remain committed to securing our place in the RV market by staying at the forefront of product development. We think our recent market share gains are certainly a positive testament to the value both our dealers and mutual customers are finding in our products in the ancillary programs in services we provide.

With that, I will turn this back over to Kay.

Kay Toolson

We will open it up for questions and answers.

Question-and-Answer Session

Operator

(Operator's instructions) Your first question comes from Kathryn Thompson - Avondale Partners.

Kathryn Thompson - Avondale Partners, LLC

Just focusing on your breakeven assumptions, I assume that the 175 would be effective starting in the fourth quarter but you would not see a breakeven point of 175 in Q3. Is there a correct assumption?

Kay Toolson

That is correct and in fact depending on some of the discounting goes and some of those other assumptions, the full impact may not be there until first quarter of '09 but a significant amount of that impact will be in fourth quarter.

Kathryn Thompson - Avondale Partners, LLC

Okay and just assuming 175 at the breakeven point, what would that imply in terms of capacity and utilization? I mean, will it be like a 70% to 60%?

Kay Toolson

I think it will be somewhere in the close to the example I gave or the 70% to 75% for Class A's.

Kathryn Thompson - Avondale Partners, LLC

I did notice you had a lower tax rate in the quarter. What should we expect for Q3 or at least for the remainder of part of this year?

Kay Toolson

It should run somewhere into that. As you are in a law situation, you get less benefit from taxes as when you are in the positive income side which is the other way on us and it has a little bit higher tax rates. So, that is the impact there. So, the short answer is that it should be somewhere going forward after the remainder of the year.

Kathryn Thompson - Avondale Partners, LLC

And excluding one time charges which that we confirm that should be at some point $5 million in the quarter. Should we expect essentially similar gross margins going into Q3 from Q2?

Kay Toolson

I would say that given everything we are trying to do this quarter, I think we have try to factor into the $7.5 million some inefficiency and everything else but there is a lot of moving parts this quarter so it is difficult to say.

Kathryn Thompson - Avondale Partners, LLC

Could you just elaborate just a little bit more what your mid to long-term plan for your Elkhart and Wakarusa plant in terms of are you going to sell them or just idle the facilities?

Kay Toolson

Well, I think they were probably going to make a decision on that pretty soon. It is likely that we will not want to sell all the facilities but it is also difficult to estimate which ones are going to be a potential buyer might want so it is likely that we might put most of the facilities up for sale and then if we are successful in taking the big chunk of it out, we probably keep the remaining not what the remaining might be. There are certainly a number of combinations of, I mean we are basically idling $2 millions worth of plant facility and so there are obviously a lot of combinations that we could then in fact, fire back up when the market turns.

So, if we could remove millions square feet of capacity and so we are probably pretty happy with things at this point.

Operator

Your next question comes from Ed Aaron - RBC Capital Markets.

Edward Aaron - RBC Capital Markets

First, could you talk a little bit about the consideration you might have given to your dividend in this environment?

Kay Toolson

I think we are still talking about with the Board and say absolutely it will be being going to be at least reduced. We are having some discussion. There are some institutional funds that require dividend for them to have our stocks. So, we are considering that. We talk with the banks about it. They seem to be amenable to reducing the dividend to some smaller amount.

Edward Aaron - RBC Capital Markets

Marty, can you talk a little bit about the debt that you have restructured both in new credit facility and the sub debt that you would be taking on? Can you just give us some kind of directional sense of what the cost of capital would look like and then secondly what the covenants might look like compared to the prior facility?

Marty Daley

Yes, sure. In terms of the range of cost of the debt, obviously there is some initial cost to get the loan in place in particular because it is syndicated type arrangement on the senior credit facility and then as we go to the ongoing cost, it looks like probably, we are looking at the senior facilities to be around LIBOR plus 350 kind of range. However, on the subordinated debt, it is going to be a little bit higher cost on that. I mentioned we could be over 10% in that range for that piece of it.

Edward Aaron - RBC Capital Markets

And any difference in the changes in the covenants?

Marty Daley

On the covenant side, when you are in the asset base lending, typically there is a certain level when you are borrowing, when you have enough excess capacity between what you are borrowing and what you asset base is. I mean your borrowing base then you really do not have covenants and then they kick in and typically that is around 20% range. So, if you are borrowing more than 20% of the facility or what your borrowing base has then the covenants will kick in at that point and it typically would be like a fix charge covered ratio. So, it is borrowing more than 80%, having excess capacity of 20%, just to be clear on that but that is something that we are working through in terms of what initial covenant would be on that arrangement for the first year for example before we stabilize things.

Edward Aaron - RBC Capital Markets

Okay and then my last question relating to your comments about the $175 million breakeven point. Is that at the EBITDA level or at the EPS level?

Marty Daley

I think we are talking at the EPS level.

Operator

Your next question comes from John Diffendal - BB&T Capital Market.

John Diffendal - BB&T Capital Market

By moving your motor home production to the West Coast, what do you loss in that process? I mean, by obviously not having an East Coast, your shipping coast will be greater I would think. What do you sort of see on that side of the equation.

Kay Toolson

We actually ran the numbers in terms of the differential in shipping cost base on our distribution and we actually have a pretty good distribution into the West Coast. So, in some cases, that is actually working to our advantage. Really what we are doing is moving the lower price units out to Oregon and so our bread and butter diesel products if you will have always come out of the West Coast. So, that is not really changing.

We are not expecting to see a major difference either in our material cost or our distribution cost for that matter. In fact, we think it may actually help us on the West Coast.

John Diffendal - BB&T Capital Market

And any impact on the JV?

Kay Toolson

No, we are actually working through that with Workhorse and Navistar currently and JV is just planning on continuing to operate and at this point, it is unclear whether or not they will be moving out to Oregon or we will have, still have a remaining in Elkhart although it appears maybe there will be a combination of the two.

John Diffendal - BB&T Capital Market

And lastly, you were talking about discounting environment being pretty tough, could you characterize it? I mean give us some comparison in terms of how you sort of see that the discounting that you are in right now say relative to the last big discounting environment? I think we had I guess which was on the '05-ish I guess. How do you sort of view the differences there?

Kay Toolson

I guess I am not sure I could characterize that. I would just say that this is a pretty robust discounting environment. I mean obviously when you go from shipments down 20% or 25% to down almost 60%, I mean that is pretty abrupt and as I know you know based on following the industry for a number of years, the manufactures in this industry cannot adjust that quickly with the correction levels and so there will be a period certainly into this quarter that we are in right now that we continue to see discounts.

John Diffendal - BB&T Capital Market

And just lastly so in terms of in age and I mean it is, you are doing both retail and wholesale promotions. I mean how are trying to, what was the sort of emphasis are you doing on trying to put this inventory out?

Kay Toolson

We have used a combination. In fact, I would say that as I look around the industry as the other manufacturers were all doing the right things. We are all trying to reduce our finish goods inventory. We are all trying to help dealers move the units off their lots. I mean there is not a lot of opportunities or alternatives basically to set the block and tack on good done.

Operator

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

Analyst for Craig Kennison - Robert W. Baird & Co.

Couple of questions, first have you had an appraisal done to assess the market value of asset you plan to sell? Could you maybe give us a sense of what you think that is as well as the value of the outdoor reserve properties, any shuttered facilities and other assets?

Kay Toolson

Yes, regarding to the facilities that we are going to be idling in Indiana, we are currently getting some appraisals done on that so we do not have a good feel yet for how that is going to come out. I mentioned there could be some impairment charges that we take on that just in look at the market in that area, the country and such. We just do not know what the magnitude is going to be on those impairment charges yet.

Analyst for Craig Kennison - Robert W. Baird & Co.

Could you ballpark just kind of like a value per square foot for the manufacturing space or something?

Kay Toolson

No, we really could not. I mean it is, we looked at different faces of things and smaller plants. It depends on the size of the plants that you are working with and whether you kind of break them up into individual plant sales or try to sell it all together. So, there is a lot of prefecture that go into that. They can give you a wide range of dollars per square foot and we just do not have any early indication from that group yet. They have just barely initiated that type of process.

Analyst for Craig Kennison - Robert W. Baird & Co.

Okay and then you mentioned the press release that purchasing initiatives are offsetting raw material cost inflation. That seems like a tremendous achievement given the sharp rise in commodity cost, could you maybe give us some more detail on what you are doing there?

Kay Toolson

Well, I think that is something that we have been talking about over the last couple of conference calls and it is really an extension of what we have been partnering with Navistar and Workhorse on their chassis manufacturing that we have done the joint venture with that we found that they were very effective in their purchasing area that get pricing improvements for us for the purchases of the chassis material and then as we were in that process, they saw also other opportunities in other areas that from the material that we use in what we call the box and which is everything built up from the chassis and so we set up an agreement with them that as they go out and find savings for us that we will share the first year 50% with them on that savings and then we get all the savings going forward after that first share to ourselves. So, it is a good set up for us and them in terms of leveraging what they do very well on the purchasing side of things.

Analyst for Craig Kennison - Robert W. Baird & Co.

Okay thanks and then just finally with the finish goods, what is the goal for the level of finish goods inventory by the end of the year?

Marty Daley

I think normally we try to have that in the, I do not know, $25 million to $30 million range. So, that is like they are almost cut in half.

Operator

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

Barry Vogel - Barry Vogel & Associates

I am very concerned about, I am not concerned about what you did because that obviously was a major restructuring to try to keep the Company literary in business and theory because we do not know how long this is going to continue in terms of the economic climate for people not wanting to go buy Class A motor homes generally.

So, it is your sense of urgency, would that include eliminating the dividend and perhaps think about getting out of the land resource business and even though it is not going pay a business, it offers you significant liquidity because from what I understand, you have about $40 million of that assets in both land and lot inventories. So, Kay I was wondering if you can comment on that given the fact that we do not know exactly what is going to happen in these twelve months.

Kay Toolson

I cannot comment on that. We are looking at a variety of things in an effort to improve our liquidity certainly and we are looking at some things on the resource side of our business to everything is on the table to look at obviously to improve our liquidity and make sure that we come through this stronger and more viable company than we want into it and so we are looking at everything at this point, Barry.

Barry Vogel - Barry Vogel & Associates

You talked about fees for the refinancing and you did not mention any dollar figures and I know that Bank of America, if they are going to do this with you, they are going to want to get a pound of flesh because that is what the bankers do especially when you need them most. So, can you give us some idea what the fees might be involved for the financing to be successful?

Marty Daley

I can tell you this that we did part of what we signed with them is a confidentiality agreement on fees. So, I cannot really comment about that.

Barry Vogel - Barry Vogel & Associates

And when you talk about LIBOR plus 350 basis points, what would be the LIBOR portion of that? What is that going forward now?

Marty Daley

That is around 3%.

Barry Vogel - Barry Vogel & Associates

So, they would lend you money on the asset based lending for only 6.5% interest rate?

Marty Daley

Yes.

Barry Vogel - Barry Vogel & Associates

That is pretty cheap money. Now, what is the timing of that for that to be, is there any time schedule?

Marty Daley

The time schedule would be is as soon as we are able to get obviously we have got the negotiation of the definitive credit agreement but then really more importantly it is getting to where we have that availability which is $40 million of opening availability by the time we close. That will be the limiting factor which we feel pretty comfortable based on the interest we have had from a few different lenders working at it that we can get that done by the next conference call we have got.

Barry Vogel - Barry Vogel & Associates

John, I have a couple of questions on that utilization rate discussion that you had.

John Nepute

Yes.

Barry Vogel - Barry Vogel & Associates

It is a little confusing. On that fourth quarter utilization rate, were you assuming a $175 million in the revenue for that quarter?

John Nepute

I think that is about where we are estimating, yes.

Barry Vogel - Barry Vogel & Associates

Okay and would you be splitting up the utilization rate between towables and motorized to give that..?

John Nepute

That was strictly a Class A calculation, Barry.

Barry Vogel - Barry Vogel & Associates

So, was that 75%?

John Nepute

Yes.

Operator

Your next question comes from Bob Simonson - William Blair.

Bob Simonson - William Blair & Company, LLC

You have talked in the press release about the possible further impairment charges on some of the assets. Has there been any discussion with the auditors about the goodwill that you have on the books and does that goodwill number enter into end of negotiations for borrowing money?

Kay Toolson

Well, I guess that is a two part question. One, part in terms of the lending from the banks, obviously they do consider what is happening on goodwill to some extent because part of what you are seeing depends on your forecast of where you think things are going to be going forward. Considering the restructuring plan and what we have got in our go forward analysis, considering a few different assumptions on sales volume that can happen in the future years and things like that, that is really where they are looking at in terms of where we are at. I would say if we were looking at a goodwill impairment charge from their initial reaction is not a huge issue as to non-cash kind of charge so it does not drain cash out of the Company but to the extent of the impairment with what kind of indicate something one way or another in terms of our forecasting going forward, of course we had provided extensive forecast to the banks and our restructure plan and how that impacts that forecast that walking in through all the assumptions that we had made in that.

So, that is where we get them more comfortable with what is going on. Really on the other side in terms of the goodwill with auditors, I mean it is really just a matter of according to the accounting rules, you do need to what is considering a triggering event, you need to evaluate your goodwill impairment whether you have an impairment or not and certainly with the declines in the market this quarter, we did consider that as a triggering event which led us to evaluate the goodwill and come to the conclusion, based on our restructure plan and our forecast going forward that we thought have an impairment charge in either our towable segment or motorized segment.

Bob Simonson - William Blair & Company, LLC

Okay and assuming you close your debt financing in the third quarter, when that gets or goes in, that is a debt issue so you get all of the money at one time? What I am saying is how much..?

Marty Daley

Bob, the subject we would be the other part is officially a credit facility like the other lines.

Bob Simonson - William Blair & Company, LLC

So, you just draw on that?

Marty Daley

Right.

Kay Toolson

It was drawn as it uses, as we need it and as we get money in that down.

Bob Simonson - William Blair & Company, LLC

Now, can you use that to pay down the higher debt on the 30 to 40 whatever you borrow, the sub?

Kay Toolson

It depends on how that subordinated debt is structured. Typically, those lenders would like to have that debt outstanding for longer period of time.

Bob Simonson - William Blair & Company, LLC

Okay and on your restructuring charges going forward if you have some or the third quarter once that you have already set a roughly $78 million, what line item does that go through?

Kay Toolson

That will in additional, I think it is in additional line item that we will include probably after our SG&A cost line item on the P&L.

Bob Simonson - William Blair & Company, LLC

So, it will not be smooched into..?

Kay Toolson

No, it will be separated out there so people can see what those charges are and as we mention before on the idle facilities that are going to be idle. We have not come up with how much of impairment on those and what that could be. So, those are not included in that $7.5 million dollar number.

Bob Simonson - William Blair & Company, LLC

Is there any conjecture on your part what the ultimate use of your Indiana plants could be in terms of broadening the appeal to potential buyer?

Kay Toolson

We are talking to real estate people now. There is a variety of there is interest in them. There is a variety of uses for those manufacturing facilities. It could all the way from warehousing to manufacturing of other products. We are certainly trying to help find, working with the state to try to find the other companies that would be willing to come in. That would employ some of the displaced employees as well.

Bob Simonson - William Blair & Company, LLC

Okay and are there any other assets that you have that you might contemplate like a building, a headquarters that you can do a sale of lease back on or any other opportunities to liquefy?

Kay Toolson

We have not looked at that right now but certainly those are revenues but as I said earlier to Barry Vogel's question, we are looking at other alternatives on our resource profits whether be it a joint venture with someone or whether it be a sale of them or whether it be disposing of some of those properties or not. There is a variety of things that we are looking at.

Bob Simonson - William Blair & Company, LLC

And the finally one, fairly you and other publicly traded companies who reported exhibit tremendous question on our industry, is it possible to get some background or thoughts from you on the non public part of the industry is doing it? Are we going to see, I mean Winnebago's reduced capacity, you have reduced capacity. It is going across how much is coming out of the industry now?

Marty Daley

There is a significant amount coming out. There are several other RV companies that are private that are to be their shutdown or shutdown sections of their company. Some that will or shutdown in able to return that is just loss capacity and some that are just reducing significantly their footprints. It is impacting the non public area even more than the public area probably because most are less capitalized or more under capitalized than what the public companies.

Bob Simonson - William Blair & Company, LLC

Can you share any either numbers or names or both?

Marty Daley

It is, I mean obviously there was some of them that gone out of business. Alpha Leisure went out of business, shutdown. National RV went out of business, shutdown. Western Rec went out of business and shut their doors. Travel Supreme went of business and shut their doors. Weekend Warrior, which was a big towable company in Southern California is either shutdown or shut obviously significantly down and there is a lot of others that are in that same category right now.

Bob Simonson - William Blair & Company, LLC

Okay, the National RV made some motor homes.

Marty Daley

They were significant, both they and Alpha, all of those made motor homes. Alpha and National RV were significant players on the motor home side of the business. They are out of business now.

Operator

Your next question comes from Peter Horn - Gates Capital.

Peter Horn - Gates Capital

What is the current days supply of inventory on dealer locks at the end of Q2?

Kay Toolson

It is in excess of six months worth.

Peter Horn - Gates Capital

And what was it same period last year, Q2 '07?

Kay Toolson

Last year it was probably four to five months.

Peter Horn - Gates Capital

Okay and your business, is leasing prominent as a source of financing for the purchase of RV homes?

Kay Toolson

Not really, no.

Peter Horn - Gates Capital

Next question is, are you seeing a, I read some article, I do not know how relevant it is but that some large discretionary purchases were being substituted with actual homes. RVs were being substituted out into kind of housing given the prevalence of cheap housing in Arizona, Florida, and California. Are you seeing or hearing anything anecdotal or otherwise about that happening?

Kay Toolson

I think we had one dealer tell us, a dealer in Canada said that they had a couple of motor homes builds working to people ended up buying houses in Arizona or in Palm Springs or someplace because they were so cheap. So, I do not think, that thing is a lifestyle and something people choose to because they love to do it and well, some may influence some people, I doubt if it influences a lot.

Peter Horn - Gates Capital

Yes and when you think about 2009 from the units' perspective internally, are you planning that units will be up relative from 2008 with respect to the restructuring that you have already gone through or you are expecting to go through?

Kay Toolson

RV is projecting that unit sells will be up I think 4% or 8% next year over this year. It is very difficult to forecast right now based on how the industry is. I was actually at a farm yesterday with Dr. Curtain who does the consumer confidence index course and he was projecting that consumer confidence would tick up the middle of next year and would be stronger as the year progress and that RVs particularly motor homes would comeback stronger towards the second half of next year. No one knows what is going to turn and how quickly it is going to turn.

Operator

Your next question is a follow-up from John Diffendal - BB&T Capital Market.

John Diffendal - BB&T Capital Market

Just a follow up on the new facility, Marty, I think you said you are expecting LIBOR plus 350 and I guess the way the other one was you had a revolving line plus a term loan. Remind us what rate you have on that in sort of an overall, I mean would you also have a term loan to this or not?

Marty Daley

On our existing facility, we are at LIBOR plus 250 and you correct we have a term fees currently with them that line the credit. What we would have in essence is that somewhere structure in that subordinated debt would likely be a term debt financing in that $30 million to $40 million range within the $100 million senior credit facility being essentially a line of credit that would flow at that LIBOR plus 350 rates.

Operator

Your next question is a follow-up from Barry Vogel - Barry Vogel and Associates.

Barry Vogel - Barry Vogel & Associates

Marty, in the past you have given us estimates of SG&A relative to sales, gross margins, etc and looking at the second quarter when things are pretty bad with your overhead that you had and all these costs, you had a $13 million operating loss. Can you give us some general idea what the operating loss range should be assuming everything stayed the same and excluding the $7.5 million of severance cost?

Marty Daley

Well, we purposely did not put in guidance into our press release. There is a lot, I mean that is a big assumption to assume that everything would be basically the same. So, really as we have looked at it, we turn out the cost and we do know that we will have an addition to the second quarter which is the shutdown cost out there that $7.5 million. It is really unknown as to where some of those costs will go.

Barry Vogel - Barry Vogel & Associates

So let me ask you a question, based on current conditions, do you think your loss will be less than the $13 million, I am excluding the 7.5.

John Nepute

Well, Barry what I would say to that, this is John, I would say that given the current conditions, there is about as little visibility to this market as there has ever been and so that is why we are not giving guidance.

Operator

Your next question comes from Bob Simonson - William Blair.

Bob Simonson - William Blair & Company, LLC

Assuming you get the debt financing out of the way, you get 30 to 40 something like that in a subordinated. Is that then do you take down another or you would have availability then of something like a 130 to 140 or is it 30 to 40 subtracted from 70?

Kay Toolson

Well let me just run through an example really quickly. If we use our June levels of borrowing which we are borrowing $80 million at the end of June, if we got $40 million on a subordinated debt which would be like a term financing and that would leave $40 million of borrowing that I would have on that senior credit facility that has got a $100 million out there so I would have $60 million available to borrow that I am not borrowing.

Operator

Thank you very much and there appear to be no additional questions or comments at this time.

Kay Toolson

Well thank you all very much. We look forward to talking to you next quarter. It is a tough market, the one that we are battling through with lots of others. I think we have made, we all appreciate our team of people that made a great huge strides in resizing our Company and working very hard at returning us profitability which we expect to do. Thank you very much.

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