Winnebago Industries Earnings Call Insights: Capacity Utilization and Gross Margin Improvements

Winnebago Industries (NYSE:WGO) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Capacity Utilization

Mark – Robert W. Baird: First question is on capacity. Sarah, what was capacity utilization in the quarter and what would you the biggest capacity constraints today and how much ability is there to continue to add capacity both in terms of people and production space?

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Sarah N. Nielsen – VP and CFO: Well, from the standpoint of our physical capacity, the lines are completely still than running. And as I mentioned, we’ve been hiring. Unemployment is around 5% in the state of Iowa, so it is lower than the national level that we have on a consistent basis on Monday’s, weather permitting, and starting 20 plus people a week. We have attrition to consider as well as that incremental increase to plan for. So, our headcount at this juncture is a little bit under where we need to, but we’ve been keeping up for the most part. When we look at capacity and maybe they are more traditional sense that we’ve talked about it on a historical what our physical plant can do, measured in our Forest City campus, that measurement will be in 63% range. We have an opportunity to run our tow lines on the assembly areas faster, but all that takes a lot of planning and the people that support it to be trained as a balancing act that we manage day-to-day. So, we’re working through expanding the run rate and that, to Randy’s point, did result in an increased inventory levels inside over the last few quarters but a lot of efforts are underway to address the issues that have come up on running at a faster rate.

Mark – Robert W. Baird: I know chassis supply has been an issue so far this year where do things stand on that today?

Randy J. Potts – Chairman, CEO and President: The Ford gas frame chassis continue to be a constraint for the entire industry. And I think will be a constraint for the foreseeable future just based on what we anticipate the demand to be going forward versus what Ford says they’ll be able to supply.

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Mark – Robert W. Baird: Then a bigger picture question on margin, I think if you look at the prior cycle EBIT margins they average nearly 10% I think peaking close to 11%, I know mix is a little bit different today and you’ve entered towables, but is there anything else structurally different today that would curb the ability to achieve that 8% to 10% EBIT margin as the motorized market continues to grow towards the prerecession levels?

Sarah N. Nielsen – VP and CFO: I think the biggest factor is going to be the margin profile of new products introduced. We are more competitive in entering statements that we haven’t been as notable a factor in the recession timeframe. So the added volume that brings provides leverage to our cost structure, but the margin profile is at the low end for both fees and Class A gas and Class A diesel, more competitive. So that I think introduces a new dynamic, but offsetting that would be new product introductions, if you have something that the retail consumer wants. You have the opportunity to set the pricing there for that, which we’ve had great experience on some product categories in that range, but probably most notably I would say is the evolution of new product categories or lower price point categories can put pressure on that potential.

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Mark – Robert W. Baird: Just one last housekeeping. Sarah, could you give us ASP by category motorized and towable?

Sarah N. Nielsen – VP and CFO: Certainly, I’ll go through the second quarter as compared to last year from Class A gas our average selling price was $91,987 as compared to $95,478 so that was actually down almost 4% that mix weighted as we are gaining market share in that lower price point Class A gas space. From a Class A diesel perspectives our average selling price is $209,634 as compared to $191,178 for that was up almost 10%. So, Class A in total the average was $137,818 versus $133,726 up 3%. On the Class C front though very similar to a year ago, we were at $74,411 versus $74,077 so it was up just 0.5%. A and C combined was a $113,873 as compared to $110,919 that’s almost 3% up on the Class B segment $77,800 versus $75,338 that was up a little over 3% all in combined ASP for the quarter was $111,458 versus $109,177 up 2.1%. On the towable side, our travel trailer ASP down based on mix to $19,684 versus $22,051. The smaller price points, great example would be the Minnie Winnie’s, or the Minnie’s on that side of the fence, the very, very small travel trailers has created new opportunities for us, but are lowering that price point. On the fifth wheels side it was $30,490 versus $29,942, so that was up a little under 2%. In total we were at $21,853 versus $25,673, down almost 15% notably influenced by more travel trailers sold as opposed to fifth wheels compared to last year.

Gross Margin Improvements

Kathryn Thompson – Thompson Research Group: On the gross margin improvements, we know that last year’s Q2 had greater motorized discounting, so that would be a tailwind for you guys. How much of the margin was impacted by volume versus lower discounting versus any other factor?

Sarah N. Nielsen – VP and CFO: In relation to a year ago, and it had a dynamic of maybe, let’s say, 20% of our margin on expansion was due to fewer discounts incentives, it’s about 90 basis points. The remaining upside was a function of the leverage in our model. A good piece of that was on the fixed side, but we also saw improvement on the variable cost side. So, it’s kind of an 80-20 dynamic with 80% really flying though due to the – on expanded volumes and better efficiencies and 20% on the pricing side.

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Kathryn Thompson – Thompson Research Group: Given that we’ve had another quarter where fairly sizable lead times, is it safe to say I think when we last spoke that lead times could be bumping up against 8 weeks are we still at that standpoint and how should we think about managing lead times as we go into the seasonal peak?

Randy J. Potts – Chairman, CEO and President: Well, not a lot has changed since we talked about this last time. Some products for instance are backlog of gas A, starts to get into that supply constraint issue. So naturally lead times are going to be dictated by our ability to get those chassis, those are some of our longest lead times. There is just so many variables capturing, it’s really hard to probably put it in a context that spreads it across the whole business, because there is a lot of different factors there. Some products will go through our system, very quickly they are simpler, it just depends on a lot of things, but I guess it’s probably fair to say that the discussion we held about it at the close of the first quarter is still appropriate.

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Kathryn Thompson – Thompson Research Group: You gave some commentary on dealer inventories in the release which is always appreciated but, in your conversations with dealers balancing traffic and retail sales versus where their inventories now. Do they feel, if you can maybe give a little bit more color on do they feel that there is one to one ratio in terms of replacement or has that ratio even lower or even potentially higher? Can you talk just a little bit about that, that ratio of retail sale to wholesale order?

Randy J. Potts – Chairman, CEO and President: Well, we are confident that the dealer inventory levels are very appropriate to the market. I mean they’ve grown slightly. The market is growing. We’re growing faster. So, most dealers well all dealers have turn rate that they are trying to achieve and that will vary depending on dealer to dealer and their lender and what kind of products they carry. But the turn rates are improving based on our calculations. So, we don’t really look at it so much as a one-to-one, because there is some seasonality to it inventories build probably slightly over winter and then pickup in the spring. So, there is dynamics there that it’s kind of hard to look at it as a one-to-one relationship, we tend to just look at as are the turns appropriate, and I think they’re absolutely the turn rates are – I think everybody’s comfortable with them.

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