Winnebago Industries Earnings Call Nuggets: Margin Expansions and Supply Constraints

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

Margin Expansions

Kathryn Thompson – Thompson Research Group: Just going back to the margin impact that you talked about in your prepared comments, how much – if you’re looking in terms of just buckets on a percentage basis or if you want to think about in terms of basis points, how much was related to the Towable segment that you referred to versus trying to keep up with production demand on the motorized side? And it doesn’t sound like discounting was an impact in the quarter. But if you could help us understand really what was – what were the big drivers and how will that change going forward?

Sarah N. Nielsen – VP and CFO: Well, when I look at the third quarter compared to last year’s third quarter and we look at the expansion in margins, and the key contributing factors quantified on a percentage basis, about half of the improvement is a function of lower inventive and half of the improvement is a function of higher volumes and better fixed cost leverage or absorption. So, that being said, when we look on a sequential basis, the key drivers for having a fairly constant margin between second and third was a function of the mix of what we sold and rental being in that category and also new product introductions of that value priced segments of the business. Now, on a prospective basis, we’re not going to have rental – that for us, it’s typically a one quarter dynamic. We have a lot of new product also introduced that we highlighted at our Dealer Day event. Some of those products really start from a production standpoint inside our fourth quarter, so those are more products that will be delivered in quarters one and four of fiscal ’14 and material numbers, but I guess those would maybe be the first comment I would make in response to your questions. I don’t if I covered it sufficiently for you. I’ll let you follow-up.

Kathryn Thompson – Thompson Research Group: How have you been in terms of – I know that labor had been an issue (indiscernible) that was getting enough labor to meet demand. Do you feel like you’re up to speed on labor side?

Randy J. Potts – Chairman, CEO and President: Kathryn, we’re right where we need to be. Labor is always a challenge when you are growing, and I think there might have been some perception out there that it was a bigger challenge than it was. We did find the people we needed to achieve the production rates we had scheduled. We worked a lot of overtime and we have hired a lot of people. But, we’re at – we’re fully staffed at this point for the production rate that we plan to have to the summer…

Kathryn Thompson – Thompson Research Group: Have there been any changes in order rates over the past 30 days with the greater discussion of rising interest rates in the market?

Sarah N. Nielsen – VP and CFO: No, we haven’t really seen a change from the standpoint of – that orders from the dealers have been consistent and the mix as well has been fairly consistent. So, we haven’t seen that impact the order volume…


Supply Constraints

Craig Kennison – Robert W. Baird & Co.: Maybe start with the backlog, Randy. It’s a huge number. Can you ship all of that product in Q4 or do you not just have the production capacity to do so?

Randy J. Potts – Chairman, CEO and President: It isn’t so much of production capacity issue, Craig, as it is, some supply constraints. We’ve spoken to this in the past that there is a few industry constraints, most notable Ford gas A body chassis. So, that’s an industry-wide ongoing concern. The dealer bodies know that, so I think that certainly drives some aggressive order placement. So, there is a few other less significant types of constraints, but the Ford gas A chassis would be the biggest one. There is no question, but that if they were a larger supply of those chassis, we’d be at higher production rates right now to build those out, we wouldn’t sit on them…

Sarah N. Nielsen – VP and CFO: Maybe just to add to that Craig. In regards to new product introductions that also impacts on the timing of when we would be shipping products and when you look in the Class A diesel segment, a portion of those orders reflect great interest in products that we showed on that event. That production and starting here in the coming weeks after the 4th of July holiday, and so that is really going to be quarter one impact for us and prospectively. We also showed a new Class B product, which production starts late enough where that really can impact our Q4 deliveries. So, there is an impact I would say in a lot of the different categories in our backlog for different reasons that are indications of why the backlog is large as it is. Great interest and to Randy’s point, it does create a dynamic work, a lot more dealers put their orders and have bought in-line as well as the interest in new things that we have shown them. When I look back at the backlog at the end of our second quarter, we shipped little over 70% of that inside of Q3 we faced a lot of those similar challenges the quarter ago, there really hasn’t been any significant change in the forward class A chassis constrain for us.

Randy J. Potts – Chairman, CEO and President: Another thing that enters into that Craig is some dealers, place forward orders and they might not want, even though we could build it today they might not want it for a few months, so we’re not going to build it ahead of time.

Craig Kennison – Robert W. Baird & Co.: Is there anything you would say that artificial than about the backlog in other words, dealers know they can place the order today just to get in line maybe to improve their priority in line they may over order in knowing that they can cancel in a future date.

Randy J. Potts – Chairman, CEO and President: That’s always a concern haven’t seen anything like that and looking at the size of our order bank and the quality of the orders, the types of products that are being ordered and what our sales are and where the market seems to be going. I don’t have any reason to be concerned about that. But yes it you could happen.

Sarah N. Nielsen – VP and CFO: We’ve seen such a good increase in the retail registration activity on our products specifically that also helps support where the backlog is at. The dealer inventory out there in the channel is so fresh and the growth that we’ve seen in recent months is completely supportable and really it could move upward based on the growing retail demand…

Craig Kennison – Robert W. Baird & Co.: Then, just again follow-up on a point you made Sarah. To what extent is the backlog comprised of new products that really didn’t exist a year ago, so, not existing orders that are growing because of a strong appetite, but demand for new products that didn’t exist?

Sarah N. Nielsen – VP and CFO: I can probably easily give you a metric that relates to product that we just showed at our Dealer Day event and probably 8% of our backlog would be those categories, but it would grow if I would incorporate the Minnie Winnie that we showed late last fall and that’s in the C category. I mean, we’ve been producing that and expanding floor plants, and a year ago, when we introduced some of the new offerings in the Class A gas segment would also expand upon that, but if we just concentrate on very, very new products that we showed in the recent event, it’s under 10%.

Craig Kennison – Robert W. Baird & Co.: I think I heard you correctly that some of that backlog is comprised of products that you will not ship until after the fourth quarter?

Sarah N. Nielsen – VP and CFO: Yeah. Notably for the new offerings, it’s not going to be a quarter four shipment in just in light of the production starts.

Craig Kennison – Robert W. Baird & Co.: Shifting gears if I may to ASPs, could you provide the ASPs for Motorhomes and Towables by category?

Sarah N. Nielsen – VP and CFO: Certainly. From a Class A gas perspective, our ASP was 90,038 as compared to 93,611 a year ago, so that’s down almost 4%, very much impacted by new offerings that we have in that category. On the Class A diesel side, it was fairly flat with 197,832 versus 197,514, so it was up only 0.2%. our Class A gas in total based on mix of what we sold average – I’m sorry Class A category in total with 125,602 as compared to 130,283, so all a function of that Class A gas impact that’s down about 3.6%. Our C’s remains fairly flat 70,161 versus 70,008 and then our AC mix in total was 97,699 versus 103,505, so that’s down 5.6%. From a Class B perspective, our average was 77,900 versus 76,204, so that was up over 2%, and all in we saw an ASP of 97,906 versus 101,650. On the Towable side, our travel trailers ASP was 20,033 versus 21,051, so that’s down almost 5% very much influenced by the Minnie. I mean its popularity. From a fifth-wheels perspective, it was 28,217 versus 30,150 and that was down over 6%, though the blended ASP for all of the towable shipped in the quarter was 21,479 versus 25,122 down 14.5%…

Randy J. Potts – Chairman, CEO and President: Hope you are writing fast Craig.

Craig Kennison – Robert W. Baird & Co.: We did write fast. And a couple of other questions, if I may. Just a point of clarification on rental units, when you ship those into the channel, they are immediately essentially sold and then don’t qualify as inventory for the dealer in that metric that you report, is that correct?

Sarah N. Nielsen – VP and CFO: Right, they are immediately retailed.

Craig Kennison – Robert W. Baird & Co.: Got it. That is helpful. Then Sarah on getting back to the margin question and what Kathryn had to say there as well. Could you help us understand your fixed versus your variable margin within cost of goods sold today?

Sarah N. Nielsen – VP and CFO: Yeah. In the quarter that we are reporting our fixed cost, as a percentage of revenue were 5.7%. On a year ago same quarter, it was 6.6%. So, as I touched upon that was half of that the reason we saw such improvements on our margins year-over-year. We’ll be filing our Q as planned on tomorrow. So, we go into great detail on our variable and our fixed costs there, but the added volumes in this fiscal year have really been a pretty significant contributing factor to a lower level of our fixed cost, and that’s positively impacting the margins.