Winnebago Industries' (WGO) CEO Randy Potts on Q1 2015 Results - Earnings Call Transcript

| About: Winnebago Industries, (WGO)
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Winnebago Industries, Inc. (NYSE:WGO) Q1 2015 Results Earnings Conference Call December 18, 2014 10:00 AM ET

Executives

Sheila Davis - Public Relations and IR Manager

Randy Potts - Chairman, President, CEO

Sarah Nielsen - VP and CFO

Analysts

Kathryn Thompson - Thompson Research Group

Gerrick Johnson - BMO

Craig Kennison - Robert W. Baird

Michael Swartz - SunTrust

David Whiston - Morningstar

Barry Vogel - Barry Vogel & Associates

Morris Ajzenman - Griffin Securities

Operator

Good day, ladies and gentlemen and welcome to the Winnebago Industries First Quarter Earnings Conference Call. My name is Courtney and I will be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions]

I would now like to turn the conference over to Ms. Sheila Davis, please proceed.

Sheila Davis

Thank you, Courtney. Good morning and welcome to Winnebago Industries' conference call to review the company's results for the first quarter of fiscal 2015 ended November 29, 2014. Conducting the call today are Randy Potts, Chairman of the Board, Chief Executive Officer and President; and Sarah Nielson, Vice President, Chief Financial Officer.

The news release with our earnings results was posted to our website earlier this morning. This call is being broadcast live on our website at investor.wgo.net and a replay of the call will be available on our website at approximately 1 PM Central Time today. If you have any questions about accessing any of this information, please call our Investor Relations department at 641-585-6803 following the conference call.

This presentation may contain certain forward-looking statements within the meaning of the Private Securities Litigation Act of 1995. Investors are cautioned that forward-looking statements are inherently uncertain. A number of factors could cause actual results to differ materially from these statements. These factors are identified in our filings with the Securities and Exchange Commission over the last 12 months, copies of which are available from the SEC or from the company upon request.

I'll now turn the call over to Randy Potts. Randy?

Randy Potts

Thanks, Sheila. Fiscal 2015 first quarter financial results were disappointing. They were reflective of labor constraints, supply chain disruptions, and increased workers compensation costs which persisted throughout the quarter.

Ultimately, these events prevented us from completing and shipping all of the motorized units that we would have and are the main reason for our lower year-over-year margins and earnings in the first quarter.

As I just mentioned, labor constraints contributed to operational challenges which we were unable to overcome. The sustained strong growth in demand that we've seen for our products has necessitated a larger workforce to meet our increased production schedule needs.

Recruiting and developing this workforce near our main production facility in Forest City has been a challenge. Additionally, while we have aggressively hired over the past year, there is a steep training and learning curve necessary to achieve optimal production efficiency.

Unfortunately, these labor constraints not only prevented us from completing all of the motorized units we should have, but we believe they also contributed to higher labor related costs, a significant portion being an increase in worker's compensation expense which lowered margins.

In conjunction with these issues, we also experienced supply chain disruptions including quality issues with vendor supply materials and the timely availability of partners. This heightened the operational challenges within the quarter creating greater expenses particularly on the labor side again driving margins lower.

We've made progress towards solving these labor and supply chain issues thus far in the second quarter and will continue to work to the resolution. Additionally, we are exploring further opportunities to alleviate labor constraints through further expansion beyond our home based in Forest City which should be similar in nature to the expansion that occurred in Lake Mills in 2013.

Another move like this will allow us to draw from a larger labor pool in nearby communities, while keeping operations within a manageable range to our headquarters. While these labor and supply chain issues are concerning in the near term, our positive outlook for the long term has not wavered. We still see significant demand for our products as evidenced by the sequential improvement in our backlog which Sarah will discuss in a moment.

Additionally, we saw improving demand on the consumer side as the company's motor home retail registrations increased 19% in the first quarter and 30% on a rolling 12 months basis. This growth was driven by a strong demand across several product categories.

We also saw the fourth consecutive quarter of profitability in our Towables Group as the segment generated strong operating income and impressive top line performance with sales growth of just over 29%.

Recently we returned from the national RV Trade Show in Louisville Kentucky. We used the opportunity to showcase a multitude of product improvements including new floor plans, enhanced features and styling.

We met with our dealer partners, suppliers and many others from the media and investor community. While the headlines after the show told of a decrease in overall show attendance, you wouldn't have guessed it by the traffic in our display. We were extremely busy with excellent foot traffic in order activity throughout the entire event.

Now, I'd like to highlight two strategic initiatives recently approved by our Board of Directors. The first involves the engagement of a global business consulting firm to review and consult on our company's procurement and sourcing of materials. The objective of this project is long term cost savings for our company.

As a result of the project, we expect to incur an additional $2.6 million in G&A expenses over the next four quarters. This will be partially offset by improved margins potentially beginning in our fourth quarter. When fully implemented, we anticipate this investment to provide gross margin expansion of 30 to 50 basis points.

The second strategic initiative is in an area that we've been evaluating for the past several years. The Board has now approved the purchase in implementation of a modern ERP system which will replace our outdated legacy systems.

This project will deliver long term cost savings through the optimization of supply chain management and operational efficiencies once completed in addition to a reduction in system maintenance, internal development and support costs.

Our current estimate for the implementation of this project is $12 million to $16 million over a three year timeframe of which we expect $1.5 million to the incremental G&A expenses in fiscal 2015.

With that, I'll close by saying we're working tirelessly to rectify the operational issues that impacted the first quarter and look forward to improving financial results during the remainder of fiscal 2015.

I'll now pass it on to Sarah.

Sarah Nielsen

Thank you, Randy.

During the first quarter of fiscal 2015 revenues grew just under 1%, primarily driven by strong growth within our Towables Group, somewhat mitigated by lower motorized revenue.

Specifically looking at our first quarter ASPs year-over-year, here are the key changes. Class A Gas ASP was $96,843, up nearly 4% due to product mix. Class A, Diesel ASP was $188,829 which is higher by over 9% due to a greater mix of sales of our higher line products.

Class C ASP was $72,859, which is just over 1% lower. Class B ASP was $76,795, a decrease of nearly 3% as a result of higher Travato sales. Finally total motorized ASPs were $98,301.

Moving over to our Towable product, travel trailer ASP was $20,845, up nearly 7%. Our fifth wheel ASP was $47,965, an increase of nearly 46%. Thus Towable ASP in aggregate was $25,067.

Our dealer inventory increased 34% compared to last year and stood at 4,192 units as of November 29, 2014. However on a sequential basis, dealer inventory increased by a modest 213 units when compared to August 30, 2014.

On a year-over-year basis, the increase in dealer inventory in part reflects a strong demand for new product offerings as many of our dealers continue to increase their stock of these products during the quarter. Specifically this accounted for 19 percentage points of the dealer inventory increase.

Given the solid consumer demand for these products, we believe that they will continue to generate increased retail demand.

Moving to backlog, we saw motorized bookings in the quarter of 2,254 units of nearly 19% as compared to the year ago quarter. This was a strong factor in the sequential increase of our motorized backlog to 2,122 units, a 12% increase from the 1,899 units we reported at the end of our fiscal 2014.

It should be noted that backlog at the end of the first quarter of fiscal 2014 included significant rental orders, whereas the backlog at the end of fiscal 2015 does not yet include such orders. Later I'll provide additional perspective during an update on the Apollo transaction.

Additionally, the year-over-year decline in backlog is largely due to our increased production rate over the past several quarters, which have allowed us to satisfy demand, particularly for some our newer products.

We also had an adequate supply of chassis from Ford over the past three quarters, which was not the case last year and as a result last year our Class A gas backlog was elevated.

One other point on backlog, last quarter we indicated that our backlog could represent between 70% to 90% of the next quarter shipment. With the operational inefficiencies in the first quarter and the increased order booking level, we felt a little short of this metric.

Meanwhile with increased backlog coupled with the operational issues that we are still working to resolve, we do not feel that this metric is applicable at the current time.

Gross margin declined 80 basis points year-over-year in the first quarter, largely attributable to the operational challenges that Randy highlighted. Specifically, total variable cost as a percentage of revenues accounted for a majority of the decline due to higher labor related expenses notably in the area of Workers Compensation of nearly 900,000.

In addition, margins received additional pressure as we continue to make capital investments to increase capacity and ultimately a more efficient manufacturing process.

During the quarter, an additional $300,000 of expense was incurred as we continued with the installation of a significant capital expenditure, upgrading our eco system. It is anticipated that this investment will be fully installed and operational by the end of our fiscal second quarter.

Operating expenses as a percentage of revenues were favorable, leveraged by 10 basis points for the quarter as lower G&A expense offset higher selling expenses. Operating cash flow for the first quarter was impacted by higher inventory levels, primarily the result of increased work in process inventory and raw materials and is reflective of both the strong demand for our products and the challenges that we experienced.

We anticipate improvements in working capital during the second quarter as we resolve these items; however, we do expect similar working capital needs in the second quarter as we prepare for the rental build season.

Moving to rentals, I would like to provide an update on the Apollo transaction. During the first quarter, we recorded $714,000 of net leased revenue. When looking at the balance sheet, our investments and operating leases at the end of the first quarter decreased $6 million to $10 million.

Meanwhile our operating lease repurchase obligation also decreased by a similar amount. This decreases reflects the sale of units by Apollo directly into the used market and resulting they released us of obligation for repurchase on 124 units.

At the end of the quarter, approximately 220 remained subject to the repurchase obligation, which ends of December 31, 2014. Based on the success of the initial rental relationship with Apollo, we're currently working on finalizing another rental order for them for next spring.

During the first quarter, we repurchased approximately 272,000 shares under our Board authorized share repurchase program for an average price of $21.86. $7.6 million remains on our share repurchase authorization plan, which has no expiration.

Our tax rate was 31.5% for the quarter, provided that President Obama signs the recently passed tax extended legislation, we anticipate the tax rate will be significantly lower in our second quarter. if the President signs a legislation, we expect our tax rate to be in the 31% to 32% range for fiscal 2015.

Including the ERP initiative that Randy discussed, we still anticipate CapEx in fiscal 2015 to be $15 million to $20 million.

In closing, we're disappointed with our financial results in this quarter, but maintain a positive outlook based on the continued demand that we see in the marketplace. We will continue to work to resolve the factors that impacted our first quarter by also striving to capitalize on future growth opportunities within all areas of our business.

With that, can you please open the lines for questions at this time.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Kathryn Thompson from Thompson Research Group. Please proceed.

Kathryn Thompson

Hi. Thanks for taking my questions today. The first question is -- this is more related to Class As, what percentage of your operating earnings contribution in the quarter were attributable to the Class A segment?

And then second along the same line on operating earnings, could you -- what can you quantify in terms of the type of margin profile for the Apollo orders? Thank you.

Sarah Nielsen

First from the standpoint of breaking out the operational performance by segments, we don't disclose that on a Class perspective. We definitely have a different situation from a Class A gas demand perspective because of last year's constraint on the chassis event.

Maybe Randy if you want to add any color on Class A?

Randy Potts

Well there are several other things, Sarah has mentioned the Ford frame rail kind of led that worked its way through the market is behind us and I think that made for a higher than I am going to say normal gas a mixture on a year-over-year comp.

Also a year ago, we had just launched an entire or we were actively shipping an entirely new diesel pusher product line. So the year-over-year comps while as Sarah said, we really can't provide the details are a little unusual because of some extraordinary things that were happening for us in the Class A segment a year ago.

Sarah Nielsen

No, no, and I totally understand that we are fully aware of the year-over-year comps. What I was really referring to is more just looking at this quarter just in a snapshot as itself trying to get a better sense in understanding of what is the real driver of your operating earnings.

And we -- I have to say I've good understand that how much Class As are of your total revenues on a cyclical basis, but the what we're wanting to get a better sense of is how much operating earnings is being driven by As and also just trying to get a better sense of what are the margins of your Class C rental products?

Well and that was the second part of your question and in relation to the margin profile, when you look at the Class C business from a rental standpoint you'll see that last year's order was under a 60,000 ASP price point.

Now because we have the arrangement of the operating lease element of that transaction that plays a different characteristic because the revenues on the units that we are leasing, we have to amortize over a period of time.

And so as I mentioned we had still $714,000 of revenue in Q1 related to that transaction from last year in our third quarter and so that creates a different margin profile because really all the expenses associated with that were incurred in fiscal '14. And so it really changes I guess the way it's listed in the P&L because of accounting requirements.

Moving back to the margin percentages throughout all the classes, there is not a because we have a low, mid and high in each segment, the margin profiles we follow along, but when you blend that on a series average, the differential is not that significant.

You're talking maybe 1% and 1.5% difference between the various categories of margin profile on the Class A diesel and the Class B categories will be on the higher end and then Class A gas and Class C are closer together in a little bit lower. If that's helpful, that's a little bit of added color for you.

Kathryn Thompson

That helps somewhat. And just specifically for gross margins in the quarter, could you just put in broad buckets what was the greater determinant of the pressure because it has some barring on what it's really one time or what's something it supports that will take a couple quarters to work through?

So for instance, how much was the supply disruption versus difficulty in gaining labor versus just operating inefficiencies?

Sarah Nielsen

Well, as we mentioned in our prepared remarks, the lion's share of the pressure is all variable cost related. Notably as it relates to Workers Comp, as I shared back once occasion, that was a significant pressure for us and we attribute that to be a function of working overtime for an extended period of time.

And still our newer employees were working hard in regards to any of the injuries or any of the effects of the Workers Compensation to be something that we improve upon on a perspective basis, but that is a fact of our quarter and when you take that quantification, that's nearly 40 basis points as pressure.

The installation of the eco system that I mentioned is more isolated and as we finalize that in Q2, that's not going to be pressure for us on a going forward basis and that was closer to 13 basis points in the quarter.

From a labor inefficiencies perspective, that's in the range of 30 basis points to 35 basis points of pressure and harder to split apart from in the supply chain element, which is very much correctable.

But also the training of our new employees and that's going to be a part of our future to some degree as we continue to expand and hire more individuals. Maybe I'll let Randy comment as well.

Randy Potts

Yeah, the other thing I would add to that is really dependent on what the supply chain issues are they can have a pretty dramatic effect on labor efficiencies.

If the supply chain issues and we have some really painful examples of this in the last quarter were, some of the issues were quality issues of components that we buy that weren’t detectable until the product was nearing its completion stage.

And the detrimental effects of that is that the product now, not only doesn’t go through the regular process of being completed and shipped, but actually goes back into the system requiring a lot of extra work and so that creates work in process, inflation, inventory issues and labor efficiencies because of all that extra work.

That was also a big part of our labor challenges that it wasn’t just finding the right amount of people, it was managing a lot of those issues we had.

Kathryn Thompson

Okay. Great. And could you -- appreciate the color on the ERP system and I may have missed it in your prepared commentary, but when will you start the process of implementing that system?

Sarah Nielsen

That's going to be part of Q2 and we're starting immediately. As Randy mentioned, that has been an internal evaluation for the past two years. So a lot of work has already been done in regards to how we're going to approach it.

But it's not something that happens quickly because we have to ensure that everything is in place and fully tested and validated before we would put anything live into production. So we look at it taking us the next nearly three years to be complete by the end of fiscal '17 ideally or earlier if possible.

Randy Potts

It's a big deal.

Kathryn Thompson

And is it SAP or Oracle product?

Randy Potts

Microsoft dynamics is who we are going to partner with.

Kathryn Thompson

All right. Thank you for answering the questions today.

Randy Potts

You're welcome.

Operator

Your next question comes from the line of Gerrick Johnson from BMO. Please proceed.

Gerrick Johnson

Good morning. It looks like most of the constraints were in the Class A side. How were you able to grow Class B and Class C yet to having difficulty in Class A?

Randy Potts

Specific to Class A, but some of it is also in the nature of what I mentioned where the level of Class A business comparison to year-over-year is a little bit skewed just because of what happened a year ago.

I would say that one of the real painful constraints that we experienced that was more specific to Class A had to do with a component that is specific to Class As and it is a component that required a lot of work to be made acceptable and the defect really didn't exhibit itself until the product was pretty far through the process.

And that was for the most part that specific supplier quality issue was for the most part specific to Class A. So I would say of everything that we built was in that first quarter that would be the most relevant one.

Gerrick Johnson

Okay. Can you tell us what that part was?

Randy Potts

Well it had to do with our exteriors, the exterior appearance of the unit. I really don't want to drag a specific supplier by name into it, but it did have to do with the exterior appearance of the finished product.

Gerrick Johnson

Okay. Got it. And then when you say Workers Compensation, is it accurate -- are you referring to injury payouts? And if so, if there were injuries that occurred, did that shut down the line at all to rectify any problems or am I getting that entirely wrong?

Randy Potts

Well you're part right. It does have to do with injuries, but most of them are and I don't want to minimize it, but there are the kinds of injuries that often come in the type of work, you’ve got a lot of people working with hand tools.

We do a lot to try to minimize lifting injuries, back strains that kind of thing, but you still have some of those. And most of the Workers Comp had to do with really just the normal kinds of injuries that you get in that environment, not catastrophic kinds of injuries, not injuries that would stop production, but we're obligated to pick up medical expenses for employees who have injuries that are deemed work related.

Gerrick Johnson

Okay, that's what exactly what I was getting at. Thank you for the clarification.

Sarah Nielsen

I was going to just follow up in relation to what the experience was with both on the payment increase and then as the reserve is established on that new information that increased our reserve level. And we do have that evaluated on a natural basis which will happen in Q2 because we are self-funded and that's required by the state of Iowa.

So there’ll be further analysis and work done on this particular subjective reserves inside of Q2, but we thought that it was appropriate to increase the reserve level based on the trends we were seeing in Q1.

Operator

Your next question comes from the line of Craig Kennison from Robert W. Baird. Please proceed.

Craig Kennison

Maybe start with your strategy to expand distribution. I'm curious about the number of dealer points that you have, however you want to measure that? And just overall how that dealer expansion project is going?

Sarah Nielsen

In regards to that progress in the first quarter, there was a lot of movement but net, net, it didn't move the needle on our distribution point.

So, in line with a lot of the discussions we've had on that strategy, it's in place and progress is being made but we didn't have any notable uptick in the distribution points in the three months since we last recorded, and the end of August, we’re approximately 2,600 distribution points in the motorized side.

But it still is very much a focus from the sales team in regards to optimizing where representation is out in the field. And I would say that the increase in dealer inventory in a great degree for new products is outward of that on the work that's being done in this quarter end and in the past quarters, because we’re getting more self based with the basically the existing network that we do have, but there are some adds and deletes happening for sure.

Randy Potts

That's a new way for us to look at our business. And one of the things that - I am not going to say it was specific to that quarter, but we do phase out certain series over time. And - well, you phase them out gradually, there comes a time where there's just kind of some housekeeping to do and go back and just say okay, those aren't real dealer points anymore and that product is been phased out long enough.

So, don't be discouraged by some lack of progress there. Sometimes it's just going to have to do with some housekeeping, but as Sarah said, I think generally there’s a really big opportunity for us.

Craig Kennison

Yeah, I would agree. And as it relates to your inventory comment, can you maybe quantify how much of the increase in inventory, is it really attributable to new dealer points rather than existing dealers taking on more product?

Sarah Nielsen

In my prepared remarks, I highlighted that the increase is primarily a result of - when we look at more product, new product in the channel that we wouldn't have had out there last year, that was approximately 19% of why we saw the increase, and the rest is just expanding shelf space of existing products with the dealers we have since we don’t really have that significant.

Those were not any changed report on distribution points and physical locations inside the quarter.

Craig Kennison

Thank you for that. And then, Sarah, with respect to your margin outlook, you’ve given some nice color on some incremental costs, such as ERP, that will hit the expense line. Where will it head, the income statement? Number one, especially on the ERP side and maybe I’ll stop with that.

Sarah Nielsen

We'll be expensing those items in G&A. From an ERP standpoint, there is an opportunity when we look out into the next almost three years to capitalize a good portion of that, but there are some immediate expenses, and that will be included to our G&A. And once we place it into service, then there will be added depreciation on a perspective basis that goes out in a longer term.

The other project we highlighted is also G&A expense, but that's very specifically targeted at our margin improvement. And we’re looking at fourth quarter potential beginning of some positive impact on that.

So, the expense will be G&A but the benefit is for incremental margins on enhancement there.

Craig Kennison

And I know you provide limited guidance when it comes to margin, but given these additional costs and what you faced in this quarter in terms of some challenges operationally, do you think the EBIT margin can expand in 2015? Or is that no longer something you would expect.

Sarah Nielsen

Well, we're definitely looking upon the whole fiscal year as an opportunity to still meet the objective that we had set forth at the beginning of the year. And I highlighted on our fourth quarter conference call that, we didn’t necessarily see, we could maintain the pace of gross margin expansion, quite at that same rate that we saw on fiscal 2014, but the plan was to grow that.

But - obviously this first quarter was a tough one and we got a lot of initiatives underway that we’re looking at in a long term, more years than just the next three quarters to really set the stage for our growth and the future for us here. But we're still working hard to turn fiscal 2015, into a positive comp for 2014.

Craig Kennison

Thank you. And then finally, Randy, just on the ERP side, honestly a number of investors when they hear ERP, they want to get up and run, but clearly it's a strategic investment you and the Board, think is necessary. Can you just maybe fill out why this is so important? And why you feel confident that Winnebago, can execute when the reality is so many firms have pursued this and maybe regretted it down the road?

Randy Potts

Yeah. It’s a very fair question. When I said we've been working on this for several years, it is the truth. It's something that we’ve had in our radar for a long time. Our legacy systems, while they've – there's over 50 years of development there, they’re very specialized to how we run the business.

There are legacy systems that are written in a language that's not current anymore, and it's only going to get harder to adapt that system to the needs of our business going forward. The legacy systems are written in cobalt, they're on mainframes. And the writings on the wall, there's just no future in that. So, on one hand, we really have little choice. It has to be done at some point.

We felt the timing was right. And we’re very, very excited about the opportunities we see in the package that we've selected. There's a lot of reasons, I won’t go into all the details. But we just think it's a really good fit. We think we have a very rationale approach to how we're going to implement this.

We’re going to try to minimize customization of the system. We've had our own really very sizeable internal IT department all these years. So, it's not like, we've been working off of paper lists and spreadsheets and we're now transitioning to an ERP system.

We have an ERP system. It's just a custom made ERP system. And we’ll be transitioning to a more modern system. So, there’s only so much information that you can gather before you take the sleep of faith. But we’re very comfortable at this. Does that help?

Craig Kennison

That helps a lot. I appreciate the answer. Thanks, Randy.

Operator

The next question comes from the line of Michael Swartz from SunTrust. Please proceed.

Michael Swartz

I just wanted to maybe follow up on Craig's, question and just maybe dig into the margin expectations. And then, maybe just around timing, when did you start to see some of the issues in terms of labor costs and some of the supply chain issues creep up during the quarter? Was it during the quarter, I would assume?

Randy Potts

Yeah, that was during the quarter. Again, it was disappointing. We did such a good job of executing in the fourth quarter. And it looked like the stage was set to really take that momentum into the first quarter and execute flawlessly. But it didn’t take long for some of these speed bumps to show up and start to slow us down.

Sometimes these things go in your favor and sometimes they don't - and, everyday we're challenged with supply issues, everyday we’re challenged with issues in operations. Typically, as a whole, they're more manageable than the ones that we encountered in the first quarter. And, it just really piled on.

And again, it was disappointing to see that it became such a headwind, but we did everything we could to work our way through them and it resulted in the quarter ending the way it did.

Michael Swartz

I would assume with at least some of this you should start to see improvement in the current quarter, particularly with some of the rework issues on some of the components that you had some issues with. And then on the labor side, in terms of the learning curve and getting people ramped up, that's probably a two, three, four, quarter item, I would suppose.

I guess, what I am getting at is, I guess the prior commentary from last quarter was about 50 basis points in gross margin improvement. How do you still feel about that given what you’re seeing, and then, in that 50 basis points, have you already included some of the potential benefits from procurement and sourcing that you're undertaking.

Randy Potts

No. We were not canceling that benefit in at that point. As far as the headwinds that we did experience in the first quarter, I am confident in saying that we - by the end of the quarter, we've worked through the majority of those issues. It just wasn’t done in time to get those units finished for delivery within the first quarter.

That’s not to say the second quarter can’t present issues, and one of the ones that hasn’t been a problem, yet this winter. But I think a winter ago we talked about a lot, and our competitors talked about even more weather related conditions. Those can always happen over the winter quarters. Not saying that yet and hopefully we don't. But right now, it looks like smoother sailing ahead.

Sarah Nielsen

Last year in Q2, seasonally, Q2 is always a quarter where you have some additional cost pressures and less - fewer needs of production. But we are continuing - focusing on trying to improve upon our performance on a year-over-year basis and that's our goal and objective.

Randy Potts

Yeah, we need to - having a disappointing first quarter means we just need to try and work all that much harder towards a successful year.

Michael Swartz

Again, and then just final question. Coming out of RVIA, a couple of weeks ago we heard from a number of manufacturers, dealers were accelerating orders ahead of the spring, kind of touching on what you’re just discussing as far as some of the - to get ahead some of the weather issues they saw last year, transport issues as well.

Is this something that you saw on the quarter? You’re seeing as well as the dealers kind of speeding up the orders into the calendar year 2014, to get around any of those potential issues?

Randy Potts

We're seeing good orders. And I can't say that we've heard that that's the basis for the good order stream. In fact, we sat down with our motorized supplier of transportation, outgoing transportation. And they were very confident that those issues weren't going to present themselves to the same magnitude that they did a year ago.

So, I am not real sure where that would be coming from.

Sarah Nielsen

Yeah, from a transportation perspective, the feedback we recently got from really key partner of ours was that employment levels haven't dipped down here in the fall of winter, like they have maybe in past years.

So, drivers are still employed now and buys and that goes well for the spring, because there will be more capacity. But I highlighted on our prepared remarks, that we saw our bookings on a year-over-year basis grow about 19% inside of Q1. And as Randy mentioned, it's not specifically attributed in our view that it’s an acceleration.

It's a demand because we have a lot of new offerings and products that I think the viewers are interested in talking.

Randy Potts

One differentiator could be that, we're not competing against our competitors for that delivery service. So, with those problems fresh on the minds of customers that get their supply out of Indiana, notably the thousands of towable products that go out of Northern Indiana, it could be more specific to that, I’d suspect.

Michael Swartz

Okay, great. Thanks for the color.

Operator

Your next question comes from the line of David Whiston from Morningstar. Please proceed.

David Whiston

Thanks. Good morning. Wanted to start on the, what sounds like a very tight labor market for you guys in Northern Iowa. I was just curious, is this really different than maybe the last time we came under recession, because - I understand you're on a well population area, but at the same time, desirable manufacturing jobs at a good company unlike here is hard to find. So, has something changed in the labor pool there?

Randy Potts

Well, there are demographic changes in Iowa, they are hard to quantify, but we've always talked about our capacity of our plant as being based on the physical capacity of a bottleneck that being our final assembly lines in a fully staffed condition. And that's how we've arrived at our capacity.

When you look at previous session in employment levels of hourly employees in for a city, we had looked at that as a reasonable target to potentially regain as the business came back and it's looking like it's harder to get there.

You just have no way of knowing until you test the waters. There's just aren’t any indicators that say exactly how many employees are going to be available to you next year. But what we are finding is that it is getting harder to find those employees and we have to come up with ways of dealing with that.

David Whiston

Have you considered or have you actually increased the starting wages that you’re offering?

Randy Potts

Yeah, we’ve done several things that are related to incentives. We don't - we’re trying to find a balance, we don't want to get into wage war with other employers in North Iowa, that won’t necessarily drive up the level of employees that are available to us and could have detrimental effects on our cost of laborers.

So, we have to be strategic and look at this from every angle we can. Again, a big part of our labor issues in the first quarter were related to these supply issues. The fact that product didn’t flow to the process the way it should. In this manufacturing environment it’s very detrimental to your labor effectiveness.

And you don't use the people you have effectively. And it was a big part of the issues we had. So, it's multi faceted. It's not necessarily as simple as just hiring more people. Naturally that's a big part of it, but that's not the only part.

David Whiston

Okay. And, moving on to working capital, Sarah, your comment on the press release, I am just trying to gauge, it sounds – there's two offsetting things going on here. Are you saying that basically inventory will be net neutral? You're saying overall working capital will try to be net neutral in Q2?

Sarah Nielsen

We're looking at working capital in total because as we resolve and move down the inventories from the Q1 to this end, we are going to be in the seasonal side of the fence for building rental up and that’s going to have an impact in regards to just kind of mix where our inventories at.

And receivables, we don’t necessarily see that, they’re going to be dramatically different at the end of the second quarter than they were at the first quarter but its so dependant on the timing of when the units are shipped inside the quarter.

So there is some volatility based on that. But - so I think you’re looking at my comment correctly, that there is maybe just an offset, so net, net we will be kind of at similar position.

David Whiston

Okay. And did you get the capacity utilization for the quarter?

Randy Potts

No. We didn't. Going back to how I discussed, we calculated capacity. If the people that we need are available to us, I think we’d say our capacity is somewhere between 70 and 80%. The growing concern over the availability of the work force is I guess why we are little more hesitant to conclude that right now.

David Whiston

Okay. And last question. If your buyback rate were to continue, it would nearly exhaust the limit, the authorization limit by the end of Q2. Is the Board looking to increase the $7.6 million limit?

Sarah Nielsen

It's definitely a topic on the agenda each quarter but with the reinstatement of dividends, and the shift does some of our cash into that form. At a minimum on an annual basis we want to be dilution neutral and we’re well beyond that this year even with the purchases that occurred in the first quarter. But - so we’ll continue to evaluate that on an ongoing basis but a key piece of I guess our use of cash as it relates to returning to the shareholders is now in the form of a dividend.

David Whiston

Okay. Thanks so much.

Sarah Nielsen

You’re welcome.

Operator

The next question comes from the line of Barry Vogel from Barry Vogel & Associates. Please proceed.

Barry Vogel

I have a question for you Randy. How would you characterize competitive conditions in each of the two segments of the RV business that you’re in, one would be towable’s. And maybe you can talk about fifth wheels and travel trailers. As separate product lines and the other would be motorized.

Randy Potts

In towables, it’s hard to get a real good feel for the market in general with us being still around 1% of the market. I can speak to how I would perceive it but that’s probably different than one of the really large competitors.

The way we approach the towable market is similar to the way we approach the motorized market. We have a product that is differentiated in ways that takes us out of the 10 other commodity perspective of products.

So we’re seeing in towables is an opportunity for that strategy. It will - and I’ve said this ever since we acquired that business, it’s probably not a strategy that’s going to see us to be a 30% market share player because at that point again you are really having to sell a lot of your product line based on price, not based on how it’s featured, and how its branded.

So is that what you’re looking for, Barry?

Barry Vogel

I guess you basically say that you’re not really – it was only 1% share with towables market. You’re not really in there competing with the larger companies. That makes sense.

Randy Potts

That's a good recap. I mean, we are but - we’re going to be more of a specialized brand. It’s going to appeal to a different – slightly different customer than the masses are. So on the motorized side, I see a very healthy market. We are a big player in motorized and the market – I suspect we have some large competitors that are really driven on price, they sell based on low price.

So their view of the market is different than ours. We don’t sell as on price, we sell on value, and we sell on the strength of our brand. But there is a lot of opportunity there I think for everybody right now, regardless of how you’re pursuing the market and how you’re pricing your product and how you content it.

I think there is a lot of reasons, to think the motorized market is going to continue to come back. There is just more positives aligned right now than I can ever recall. And I like the way its coming back in a gradual way. I think that’s healthy for everybody, the manufacturer, the lender, the dealer base.

Barry Vogel

Now in terms of the towable segment, Sarah, you started earning some money in the second quarter of last year. Can you give us an idea of what your operating profits in towables were in the first quarter?

Sarah Nielsen

The first quarter was a positive one for us on the towable side. And it was a comp, year ago where we lost money. So the operating lines standpoint, we saw nearly $900,000 year-over-year improvement.

Barry Vogel

Does that mean you earned $900,000 operating profit in the quarter?

Sarah Nielsen

No, because last year we lost money.

Barry Vogel

I don’t think it’s big deal to breakdown the operating profits at towables in the quarter.

Sarah Nielsen

From the standpoint of our towables performance, we’re now earning a margin that’s very representative of where we are on our Iowa, side of the fence. And we don’t break out any more specifics on that. And we’re - and that’s probably as much information as I can break out right now.

Barry Vogel

All right, because you took a shot as a company to go into a very competitive area and it would be nice for the investment community to find out how well you’re doing profit wise, that’s why I pursue this – now as far as that component issue that you talked about, for Class A in the quarter. Could you give us an idea what kind of component it was and how much it cost you in your opinion in the quarter?

Randy Potts

No, we don’t have quantified specifically how much it costs us. There is just a lot of different ways you could look at that. We can share a couple of the margin pressures we had more by the nature of what they were.

Sarah Nielsen

On a previous question we were talking on our labor inefficiencies and the effect that that has in the quarter - then I highlighted from a standpoint of the margins impact, where that was at in that 30 to 35 basis point range. And that's not only associated with the challenges we had on the parts side.

That's got more to it than that. But a portion of those inefficiencies were because we had to touch the product more than once or the unit didn't flow through the system as it’s designed to.

So I guess that's one of the key drivers we talked - about a couple of other margin pressures as well.

Barry Vogel

No. I know that. And what about the DNA for fiscal 2015? What's your current estimate?

Sarah Nielsen

From a depreciation standpoint?

Barry Vogel

Yes.

Sarah Nielsen

We're looking that to grow a bit in line to the CapEx that we're planning during this fiscal year. So we anticipate that we’ll be in excess of $5 million.

Barry Vogel

And only depreciation includes DNA?

Sarah Nielsen

We don't have any items that are amortizable. So at this point...

Barry Vogel

Okay. So it's about $5 million. All right. Thank you very much. I appreciate and keep up the good work.

Randy Potts

Thank you. You're welcome.

Sarah Nielsen

Thank you.

Operator

Your last question comes from the line of Morris Ajzenman from Griffin Securities. Please proceed.

Morris Ajzenman

A couple of questions, you already discussed ad nauseam, but nonetheless here it goes. This component - we just spoke about numerous times, is this done into the second quarter, this defect and making acceptable. Are we clear sailing or is it still an issue?

Randy Potts

It's behind us, Morris. And I don't want to focus on just that one. The one I focused on was more specific to A bodies because it was asked that way and it was one of the larger issues, but there were several others too, but - again, the vast majority of that is behind us. It looks like smoother waters ahead.

Morris Ajzenman

Okay. Second question again, you were talking about this ad nauseam, again this quarter well again, the supply chain, the labor constraints etcetera, workers compensation, you’ve answered but I am going to ask it again, this quarter revenues of about $224 million $225 million, as to political, the previous four quarters of last fiscal year, all the quarters except the first quarter were higher than this quarter and you will position in the same manner.

I mean, is this the perfect storm why because your revenues didn't really ramp up materially to cause these inefficiencies, just the way things hit at this quarter, these issues just surface, and I am just trying to understand, it's just an anomaly, these things playing out this quarter because the revenues didn't really pick up materially at all versus previous four quarters?

Randy Potts

Yes, I don't like to put it that way because we strive to have more control of things than we ended up having in the first quarter, but a lot of things did just go the wrong way that we wouldn’t normally expect to have happened.

Morris Ajzenman

With that being the case, this second quarter outside the two initiatives we're talking about now, the global consulting firm procurement and then the ERP system. Should things revert back to normalcy in this current quarter, excluding any weather, as far as the issues you discussed, is there any reason we should be concerned about this second fiscal quarter versus what happened in the first quarter?

Sarah Nielsen

Well as we've highlighted, our goal is to resolve and accomplish a more -- a quarter where we're not highlighting all the challenges as we are here. I just -- as I previously highlighted, on a different question, Q2 for us seasonally is always a different margin profile than we typically would have in some of the others quarters because of the time of year.

And our goal is to continue to outperform on a year-over-year basis, but I think you're right, that we have a lot of opportunity for us inside the second quarter.

Randy Potts

And as I said earlier, it was just so disappointing to see us finish the fourth quarter so robustly. Again, everything going into the first quarter looked like -- going into the first quarter looked like they were really lined up. I hate to see our team struggle like this. Some of it’s their own fault. Some of it was just the way things were -- the ball was pitched to them in that quarter too.

And naturally our goal is to get things operating as normal. There's just a lot of things that went bump in the night.

Morris Ajzenman

All right. With two three weeks in this current quarter, again I don't want to dwell on this because I do understand the longer term scenario is very, very positive with the industry, but two three weeks that we see so far, have things returned to some sort of normalcy without being specific?

Randy Potts

We border with guidance on this, but I'm sleeping better. I could say that.

Morris Ajzenman

Thank you.

Randy Potts

You’re welcome Morris.

Operator

Ladies and gentlemen, that concludes your Q&A. I would now like to hand the call over to Randy Potts. Please proceed.

Randy Potts

Thank you. Well, we outlined several short term challenges this morning. We do have confidence in the future growth opportunities of the business. Thank you for joining our call today.

We look forward to speaking with you again, when we report our second quarter results, on March 26, 2015. And we all wish you very happy holiday season. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

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