Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the first fourth quarter 2019, Winnebago earnings Conference call.
At this time, all participants' lines are in listen only mode. After the speakers presentation, there will be a question and answer session.
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Stuart Director Investor Relations financial planning and analysis. Please go ahead Sir.
Thank you.
Good morning, everyone and thank you for joining us.
Winnebago Industries' conference call to review the company's results.
Fiscal 2019 fourth quarter and full year, which ended August 31 2019.
I'm joined on the call today by Michael Happy President and Chief Executive Officer embracing Hughes.
President and Chief Financial Officer.
This call is being broadcast live on our website at Investor that W.G.O. Dot net and a replay of the call would be available on our website later today.
The news release with our fourth quarter and full year earnings results was issued and posted to our website earlier this morning.
Before we start I'd like to remind you that certain statements made today made during today's conference call regarding Winnebago industries and its operations, maybe considered forward looking statements under securities laws.
The company cautions you that forward looking statements involve a number of risks and are inherently uncertain and a number of factors many of which are beyond the company's control could cause actual results to differ materially from these statements.
These factors are identified in our FCC filings, which I encourage you to read.
With that said I know when you turn the call over to our President and CEO Michael Happy.
Thank you, Steve and good morning to those on todays call as always we greatly appreciate your time and especially your interest in Winnebago industries.
This morning, I would like to begin with our annual overview of the progress made in transforming our business in fiscal year 2019.
In highlighting key strategic drivers of our performance.
We will then turn the call over to Brian Hughes, who will provide more detail on the related financial results and especially details on our Q4 performance.
I will then return to offer some closing thoughts as we look ahead towards fiscal year 2020.
We are extremely proud of the tremendous progress or Winnebago industries team of employees has made throughout the year.
Executing against our ambitious goal of transforming Winnebago industries, and do a premier outdoor lifestyle company.
By staying focused on and continuing to activate against our five key enterprise strategies, we have enhanced our performance and built steady consistent momentum behind our business.
Our first and most important strategy continues to be to build a high performance culture through a unique blend of leadership accountability and given.
In fiscal year 2019, we maintained our commitment to invest in strengthening and deepening our bench of talented leaders. In addition to our key leadership development Summit. We also strengthened talent and many important areas tax supply chain specialty vehicles sales management and engineering.
From an accountability standpoint, we delivered on the quarterly and annual expectations of the financial community.
And produced increased earnings per share for our investors.
And then the spirit of being a strong corporate citizen, we initiated a more elevated formal level of engagement within the company around corporate social responsibility, including diversity equity and inclusion along with community given.
The second enterprise strategy encompasses our intent to strengthen and expand our core RV business.
We have done because my resetting the strategic direction of her motor home business pursuing exciting new brand platforms to add to our RV tool kit.
During the fiscal year, we introduced our bound by the W. brand campaign on our flagship Winnebago brand.
<unk> market share growth in our class B y and dramatically improved the interiors over class a and class C motorized product.
Together with our pending acquisition of New bar, we will soon have a more complete motor home business larger more profitable significant presence in all motorized sub segments and a stronger sure why wouldn't the premium RV dealers in North America.
On the table side, we're especially pleased with the 2019 result, considering difficult market conditions.
Our two brands Winnebago and Grand design continue to complement each other nicely inform and increasingly compelling dual brands platform offering much needed balance to our legacy motor home business.
For the second consecutive year Winnebago industries, let predominantly by Grand design has outperformed the industry as it relates to organic gains and towables market share.
Over the past three years, our consolidated full line RV retail market share has risen from under 3% to almost 10%.
A significant runway and potential ahead of us.
Our third company strategy is the elevation of excellence and operations by driving higher levels of employee safety product quality and operational productivity.
In fiscal 2019, we made material strides towards advancing all three of these areas our commitment to workplace safety were zero harm is possible resulted in a nother year of meaningfully lower levels have recordable injuries and lost service.
By the way is the most important imperative in our entire business returning our employees home every night to their families in the same condition. They arrived.
We are proud of our progress, but impatient about the urgency to improve further in this area.
Our employees continue to be dedicated as well to producing high quality products, maintaining an appropriate amount of inspection as needed in the manufacturing process, but truly focusing on building quality into the product through smarter design and collaborative initiatives with key suppliers.
Lastly, we are beginning to see traction on a continuous improvement mentality, taking hold and the depth of our culture.
One example of this is the thousands of quick win ideas created an executed in fiscal year 2019 by our motor home team and North Island.
This focus on driving waste out of our processes, along with the strategic transition at Winnebago class a diesel products from Oregon to Iowa will produce increased efficiency and become contagious to other parts of the Winnebago industries portfolio in the future.
Our fourth corporate strategy is leveraging innovation and digital engagement working to create stronger connectedness and intimacy with our customers.
Winnebago industries is increasingly focused on leveraging the latest technology to ensure customers enjoy seamless outdoor experiences with their family and friends.
We announced earlier in 2019, the formation of our new advanced Technology group that will scandal landscape for emerging technologies that can be applied to our business many years in the future.
Positioning Winnebago and our brands as a leader as cost afforded technology converges for our customers benefit.
There has been significant progress of work made in 2019 around electric vehicle technology solar power lithium ion battery power generation systems remote connectivity integration user experience improvement and social Connectiveness with end users.
The addition of Neumar with their legacy of innovation I think first industry slide.
And their current R&D efforts will only bolster the energy within our company on this subject.
Finally, we are continuously looking for opportunities to expand to new profitable markets, creating a more diversified business model. We have taken bold steps in the last three years to expand our reach and profitability through the expansion of RV revenue streams. The addition of premium brand platforms.
And the entrance into adjacent Secularly similar outdoor lifestyle markets.
Through the acquisition of Grand design RV. The pending addition of numerous premium class am supersede lineups. The early stage investments in Winnebago branded specialty specialty vehicle offerings and the welcoming of the iconic Chris craft brand as an entre to the marine market, we have dramatically expanded our revenue and profit.
Stability potential across a premium portfolio of businesses.
We anticipate that approximately 10% of our revenues in fiscal year 2020 will come from businesses are markets that we did not heavy presence and at the end of our fiscal 2017 year.
In summary, our strategic transformation over the last four fiscal years has led to a doubling of revenue a tripling of both adjusted EBITDA dollars and free cash flow and they sizable increase in the enterprise value of our organization.
And this is before our Neumar acquisition is factored in.
Shareholders have benefited from our teams work and our communities have been strengthened in 2019, we will have given away five times more dollars in that annual periods and what we did in 2015 and most importantly, our employees are creating a stronger presence and impacting the communities.
With an exponential increase in hours volunteered and talents offer.
This is an exciting place to be.
In 2019, our annual revenues of $2 billion, a record net income of $112 million and RV share gains were truly remarkable considering the headwinds tariffs trade constraints economic uncertainty reckless partisan politics et cetera that challenge the industry. This year.
As a notable as those results were they were only made possible because of the outstanding contributions from all of our hardworking Winnebago industries employers nearly 4700 of.
We are ever thankful love their efforts over the year end for embracing our vision to establish our company someday as the leading provider of outdoor lifestyle solutions.
We enter fiscal 2020 laser focused on authentically differentiating ourselves from the competition around quality service and innovation gaining market share by outpacing the growth of the industries we serve.
Our competitive position and the strength of our newly diversified portfolio of product lines has enabled us to deliver solid results despite prevailing industry headwinds.
Overall organic sales growth remained strong and profitability continues to increase despite industry wide wholesale shipments in the RV market declining 20% during our fiscal year 2019 period full year enterprise consolidated revenues decreased only 1.5%.
Versus fiscal 2018.
Motor home revenues declining, 17.9%, mostly offset by strong organic growth of 6.2% in the towable segment.
Profitability continued to improve with overall gross margins ending at 15.5% representing an increase of 60 basis points over fiscal 2018, driven by the accelerated growth of our towable segment and stabilized motorized profitability.
Turning to the segments in more detail in the Towables business, our growth continues to exceed that of the industry as the unique appeal of our Winnebago branded and Grand design RV products enables us to meet the evolving needs of today's RV customers for the full year Towables revenues increased 6.2% over fish.
Still 2018, adjusted EBITDA margins contracted slightly by 20 basis points, primarily due to increased allowances.
Towable segment dollar backlog for the quarter declined 4.3% over the prior year, reflecting the positive impact of utilizing additional capacity added during calendar year, 2018, and dealer shifting order patterns due to normalizing inventory levels.
We remain committed to making smart strategic investments in the business such as the recent capacity expansion project at our Grand design RV campus announced during our Q3 earnings call. The revenue benefit of which will start to occur late in our Q2 period in fiscal 2020.
Investments like this will allow grand design RV to meet increased demand and convert more apart backlog into fiscal year 2020 sales.
Turning to the motor home segment Reestablishing a premium leadership position in this business remains a key priority for us and the launch of new products and designs continues to provide customers with an enhanced lineup of high quality innovative products for the full year revenues were down 17.9% from fiscal 2000.
The team in line with the industry and adjusted EBITDA margin of 3.9% contracted by 20 basis points. However, we were encouraged to see sequential adjusted EBITDA margin improvement in the fourth quarter of 520 basis points to 5.4%, reflecting the impact of our ongoing effort.
It is to improve operational efficiency, especially the improvement of the chastity chassis supply issue discussed during our Q3 earnings call.
The motor home team has dedicated a considerable amount of energy and resources to positioning the business for sustained profitability.
One source of market and financial pressure for the motor home segment has come from the class a diesel category, where our manufacturing and supply chain challenges surrounding our Oregon to Iowa Assembly transition affected both product availability and our gross margins.
Executing on our plan to consolidate and centralize the Winnebago brand diesel business will improve our overall efficiency and financial strength.
Additionally, the acquisition of new bar, which is the fastest growing brand of class a diesel arby's aligns with our strategy to re energize, our motor home business by enhancing our position and capabilities in the motor home market and building on the progress we have made driving growth in innovation across our offerings.
Chris craft continued to outpace our expectations for the business over the course of fiscal 2019 sales growth as well as traffic in demand for new products remained strong.
Although consumer demand within the broader boating market has been somewhat inconsistent Chris crafts premium brand continues to resonate with customers.
As we look ahead, we are excited about executing our growth plan for the business, which includes driving new product development and organic growth improving manufacturing efficiencies and expanding our reach with strong dealer partners and supporting Chris Chris growth with improved marketing efforts, we will continue making strategic investments in key.
This graph and looking for ways to drive share gains in innovation through those new products and dealer partnerships.
With that overview I will now turn the call over to our Chief Financial Officer, Brian Hughes to review, our fiscal 2019 fourth quarter and full year financials in more detail.
Brian Thanks, Mike and good morning, everyone as usual I will dive right into the numbers, providing some additional context were beneficial.
Fourth quarter consolidated revenues were 530.4 million a decrease of 1.1% year over year, driven primarily by a decrease in motor home revenues of 12.2%, partially offset by strong organic growth of 6.3% in the towable segment.
Gross profit was 83.2 million in the fourth quarter, a decrease of 0.8% year over year. This slight decrease was driven by the sales decline.
Gross profit margin increased 10 basis points, driven by favorable segment mix.
Fourth quarter operating income was 44.8 million down 2% and net income was 31.9 billion an increase of 7%.
Earnings per share were one dollar and one cents per diluted share an increase of 7.4% over our 94 cents in the fourth quarter of last year.
Both net income and earnings per share were favorably impacted by an improved tax rate, resulting from the tax cuts and job that.
Lastly, we note that net income and earnings per share were unfavorably impacted by due diligence costs of 700000 or two cents earnings per share related to the Newmont acquisition announced on September 16th 2019.
Turning to the full fiscal 2019 result.
Salivated revenues were 2 billion a decrease of 1.5% from fiscal 2018, primarily due to a decline in the motor home segment of 17.9%, partially offset by impressive growth in the total segment of 6.2%.
Operating income for the fiscal year was 155.3 million down 3.2% and net income was 111.
28 million an increase of 9.2%.
Full year earnings were $3.52 per diluted share a 9.3 increased from $3 in 22 cents in fiscal 2018.
Net income and earnings per share were favorably impacted by an improved tax rate, resulting from the tax cut and job that and a favorable change in estimate related to prior year R&D tax credits.
Fiscal 2019 consolidated adjusted EBITDA was 179.7 million a decrease of 1.2% from 181.7 million in fiscal 2018.
We have provided non-GAAP EBITDA and adjusted EBITDA performance measures in our press release as the comparable measure to help provide further clarity into our performance. The scheduled accompanying the press release. So a reconciliation between net income and adjusted EBITDA.
As these schedule so consolidated adjusted EBITDA for the quarter was 50.8 million, that's five 0.8 million a decrease.
5.1% year over year.
For the full year consolidated adjusted EBITDA was 179.7 million a decrease of 1.2% year over year.
I'll now turn to comments related to the individual segments segments and I'll start with the towable segment.
Revenues for fourth quarter were 307 million up 6.3% year over year, driven by continued outperformance in the marketplace by Grand design, RV and further benefiting from pricing actions taken during year.
In addition to pricing healthy product mix within the segment also can to can continue to contribute favorably to improvements in the average selling price per unit.
For the full fiscal year total revenues were 1.2 billion up 6.2% from fiscal 2018.
Considering the broader RV market wholesale shipments were down 20%. During the same time period. We are extremely pleased with the performance of our towable segment and the market share improvement. This performance reflects.
Segment adjusted EBITDA for the fourth quarter was 42 million up 0.2% year over year and adjusted EBITDA margin decreased 80 basis point, driven by higher input costs and sales allowances, partially offset by pricing action.
For the full year segment, adjusted EBITDA was 163.7 million up 4.2% year over year, and adjusted EBITDA margin decreased by 20 basis points.
Given by higher cost input and increased allowances, mostly offset by pricing action cost saving initiatives and favorable product mix.
Turning now to the motor home segment, our motor home revenues were 200.7 million for the quarter down 12.2% versus last year driven by strength in the class B lineup, namely our revel in trovato products more than offset by decreases in the class the and class a product.
Fiscal fourth quarter, continuing to be negatively impacted by dealers rationalizing their inventory levels, which have been taking place throughout the 2019 calendar year.
For fiscal 2019 motor home revenues of $706.9 million were down 17.9% year over year slightly better than the broader RV market being down 20% during the same time period.
As mentioned earlier dealers changed inventory replenishing patterns quite drastically in order to lower their inventory levels, prompting more industry wide discounting and decreases in wholesale shipments.
Segment, adjusted EBITDA was 10.7 million for the fourth quarter down 18.9% year over year, driven substantially by the sales reduction.
Adjusted EBITDA margin decreased 40 basis points versus last year to 5.4% driven by higher input costs and fixed cost de leverage partially offset by pricing actions positive product mix and decreased sales allowances.
Included in the higher input costs mentioned above is a 10.8 million reduction to wip inventory and a corresponding increase the cost of goods sold for a cumulative correction of an immaterial air related to prior period that was identified through our annual physical count of our work in process inventory.
Although we recorded this item as an increase the cost of goods in the quarter. This impact was largely offset by the favorable items mentioned previously most notably the favorable mix from the strong performance in our class B product.
You will note therefore in the 10-K that this cumulative correction is called out in the footnote disclosures of our quarterly result.
Despite the recognition of this correction and the other challenges mentioned earlier, the fourth quarter adjusted EBITDA margin of 5.4% represents a solid results for the motor home segment as it reflects the sequential improvement of 520 basis point from fiscal year 2019 third quarter.
For the full year segment, adjusted EBITDA was 27.5 million down 22.7% year over year, primarily due to volume reductions and adjusted EBITDA margin decreased 20 basis points to 3.9%, primarily due to higher input costs and fixed costs.
De leverage partially offset by pricing actions and favorable product mix.
The further clarify the 10.8 million correction mentioned in our fourth quarter result, does not materially impact. The full year result, as the correction is largely offset within the four quarters of fiscal 2019.
Consistent with previous quarters Tara.
Particularly China lift one two and three have impacted material and component costs, but we have largely mitigated the impact of these headwinds and our gross margin through a combination of cost saving initiatives and pricing adjustments.
Great relation between China, and the U.S. remain volatile as you all know and while we Wow, we remain hopeful excuse me in the recent potential for resolution. We will nonetheless continued to closely monitor trade discussion and be ready to execute our approach of addressing each commodity and component.
Impacted in a targeted manner seeking substitutes, where available working with vendors to creatively solve problems and adjusting the content of materials, where feasible and ultimately increasing prices on our units if necessary to counteract the cost increases.
So far these actions along with our competitive position in the strength of our diverse portfolio of product lines have enabled us to minimize the impact to our overall profitability.
Turning to our balance sheet.
As of the fiscal year end the company had outstanding debt of 254.3 million.
Comprised of $260 million of debt and net of debt issuance cost of 5.7 million.
Working capital was 212.9 million.
Our current net debt to adjusted EBITDA ratio is 1.2 time inline with our targeted leverage ratio of 0.9 times to 1.5 times.
As a reminder, following the close of the new more acquisition in first quarter 2020.
We expect to have a net debt to EBITDA ratio of approximately 2.0 times with the goal of deleveraging within our stated target range by the end of fiscal 2020.
Additionally, we recently Upsized, our NPL to 192.5 million further improving our liquidity.
The maturity with extended five years to October of 2024, and there was no change to the interest rate.
Cash flow from operations was 133.8 million for the full year up 50.4 million or 60.5% that six 0.5%.
The increase was primarily due to year over year changes to cash contribution from working capital.
The effective income tax rate for the fourth quarter was 21.1% compared to 28.4% for the same period in fiscal 2018.
The rate in the fourth quarter fiscal 2018 represented a blended federal tax rate, resulting from the tax cut ins out that which was only partially effective for part of fiscal 2018, whereas the rate in the fourth quarter fiscal 2019 represents the full year impact of the reduced federal tax rate.
We expect a tax rate of approximately 23% in fiscal 2020 under the current tax code and before consideration of any discrete tax items.
On August 14, 2019, our board of directors approved the quarterly cash dividend of 11 cents per share payable on September 20, Fiveth 2019 to common stockholders of record as of the close of business.
September 11 2019.
Before I pass the call back to Mike I'd like to touch on the Newmont acquisition timeline as we stated at the time of announcement on September 16th we expect the deal to close in early November .
We intend to share some of the impacts from items, including transaction cost purchase accounting and financing costs at our upcoming Investor day on November six to help the investor and analyst community begin anticipate the Q1 and full year contribution that Neumar will have in our consolidated results.
We will also provide more context and insight during our first quarter 2020 earnings call followed by an amended 8-K filing anticipated in early to mid January .
That concludes my review of our quarterly and full year financial as well as touching on the next steps as it relates to the new on our acquisition. So I'll now pass the call back to Mike.
For some final comment Mike.
Thanks, Brian .
Throughout fiscal year 2019, the RV industry has seen its share of challenges from dealers and Oems rebalancing their finished goods inventories to the fluctuation in interest rates.
To the impact of tariffs and trade issues on end customers pocketbooks and confidence.
And yet industry retail has remained incredibly solid, especially our company's retail from a historical perspective, considering these headwinds.
The demise of the RV lifestyle has been a bit exaggerated in our opinion from a retail perspective.
We would like to take a moment and provide some further thoughts on the health of the overall RV market and then share some commentary on areas of future focus within the Winnebago industries team.
Over the long term, we like many of our outdoor industry peers remain confident and bullish that the growth and penetration prospects of the recreational vehicles and marine segments in North America are trending in a net positive direction.
The appeal of the outdoor lifestyle, especially those activities broadly spent with family and friends, creating new experiences is becoming increasingly popular with what we view as a multi generational customer base.
In addition to baby Boomers, who are a key customer group for several of our businesses millennials and younger demographics are actively seeking unique outdoor experiences.
Our customers appeared to have a growing sense of adventurism and are opting for healthier and mobile lifestyles.
Technology and mobility mediums are allowing all of us to have connected experience as outdoors, regardless of the use case camp grounds and marinas remain busy and in some cases full.
We have seen a steady flow of traffic at retail shows around the country. This fall, including the recent California RV show. We're attendance was set to be materially higher than a year ago. Despite several days of high winds in southern California.
We continue to see the mix of auto sales shift to truck and sport utility vehicles, which have become a significant catalyst for consumer investments in towable, Rvs and marine products sands, any geopolitical or macroeconomic disruptive events, we are quite comfortable that these and other secular trends some.
The notion that the RV and marine industries will remain generally and increasingly attractive to consumers.
Over the last 12 months, we have witnessed the RV industry double digit shipment growth rate transition to a double digit negative shipment trajectory in that time period as the industry appropriately resets for the future.
Lower than expected consumer demand over that period also played a role in the length of time needed by dealers to rationalize and adjust their inventory levels.
We believe there may be another two to three months of nominal inventory reduction in the field that the industry level, but that most dealers have reached a comfort zone in terms of inventory turns dollars and agent.
We have been very direct the Winnebago industries field inventory across its various brands is in line with where it needs to be going forward to compete profitably for increased share.
The market in many census, it has reached a better state of equilibrium in terms of the power balance between dealers and Oems good brands with good products in good business support processes are winning.
And those brands with less competitive products and less dealer friendly support will continue to be rationalize by many dealers.
In order to preempt the inevitable question. This morning, we believe that industry retail in the North American RV market for our fiscal year 2020 will be down low to mid single digits. Assuming there are no major changes in consumer confidence or access to financing.
Given field inventory has worked its way back into better shape, we believe that industry wholesale RV shipments in fiscal year 2020 could that's a key word could return by the end of the period to an annualized flat level compared to fiscal year 2019 industry shipments as a more.
Balanced retail replenishment flow will eventually offset the steep shipment declines we saw a year ago.
This shipment outlook is a bit more optimistic than the forecast, which RV has published which is rare for me to acknowledge what industry retail is moderately okay. The shipment environment could be better than expected.
Now Winnebagos consolidated RV retail sales in fiscal year 2019 outperformed the general market by 10 to 15 points and we expect to be able to maintain that double digit outperformance margin at retail in our fiscal year 2020, especially as we add new more to the portfolio.
Given we are still a very small player in the marine industry, we will respectfully decline to prognosticate on industry fundamentals in that market and deferred to the end M&A or other longer term industry players.
We do continue to be pleased with the feedback from this falls RV retail industry shows our new products unveiled to dealers at this year's open house in Indiana received strong feedback positive feedback from the channel. This resulted in consolidated new orders across the Winnebago and Grand design brands.
That were cumulatively, 11% higher than what we achieved a year ago in Elkhart.
That momentum has also continued semantically as we have had encouraging results at our two large regional retail shows it Hershey, Pennsylvania and fund Panna, California.
Our consolidated retail performance at those two events combined for our brands was up high single digits percentage wise versus results at the 2018 shows both outcomes validate for us that there is life and energy within the industry at the dealer level and that end customers are looking to step into.
Two or up within the RV lifestyle.
Back to new products I would like to review this morning, the highlights by business of whats actively hitting two arriving in the market to reinforce how vibrant our new product pipeline yes.
Chris craft has been and continues to be during one of the most.
They have continued to launch one of their most significant new product introductions in their recent history.
The launch Jeep Gizzi line introduction has included 35 and 25 foot models in Stern drive and outboard power options.
Chris Craft is also joined the wake served market trend with the introduction of its launch 28 GT W. FX addition.
Grand design is always reinventing itself in this year is no different the solitude reflection imagine and transcend product line to each been updated with new interiors, including countertops wallboard cabinets hardware carpet and many other amenities.
Winnebago Towables made us flat at the recent open house with the introduction of its new voyage fifth wheel in travel trailer, while the Spider toy hauler fifth wheel and a concept product called hike that like our four by four rebel van is striking a chord with dealers ready to serve the extreme explore.
And lastly, Winnebago motor homes continues to be very active in refreshing its entire lot new interiors are found in the class a intent and forza as well as the classy outlook and Vito portal.
They added movie theater seating to the many winning introduced new exterior color screen in white with the trovato and stole the show in Elkhart with the introduction of the new class B solids, and affordable high quality top top camper van.
We are ready to roll hitting into fiscal year 2020, with these new products.
Winnebago industries will be holding our Investor day event on Wednesday November six and New York City attendees are asked to RSVP with Steve Stuber, and our Investor Relations team.
During this event, we will begin to share a bit more information about the pending edition of the Neumar brand.
When the transaction closes in mid November Winnebago industries will be home to three of the best brands in the RV industry Winnebago Grand design and Neumar.
And for off the top brands in the outdoor is if you include Chris correct.
The close process continues to go well with our outside partners in the Neumar team. They have continued to do good things in the market outperforming their peers at retail and experiencing solid results at the open house show and the larger regional retail events.
We remain extremely excited about the opportunity to welcome a high performing team in Matt Miller and all of the new more employees, but we are even more excited about their future capability to grow customer and dealer satisfaction and profitable share in the motor home category.
Since our acquisition announcement in mid September almost all industry stakeholders have acknowledged the quality and momentum of new law and many many dealers have proactively engaged neumar to inquire about their future product and distribution plans.
We will integrate this business extremely carefully and likewise manage our new balance sheet with careful diligence and an eye on de leveraging quickly in 2020.
These continued to be interesting tops, we will monitor the shifting macroeconomic conditions, especially consumer confidence stability of the equities market. The interest rate landscape fuel prices access to credit political developments around such policies as import tariffs the upcoming 2020 elections.
Michael and other global geopolitical events.
We cannot predict whether an economic recession or goal will happen, but we can be disciplined and prepared in the event of either one.
By staying focused on what we can control and emphasizing a commitment to quality innovation in service and all we do we have made significant strides towards our goal of transforming Winnebago industries over the last four years, we believe that if we take care of our employees. They will in turn take care of our dealers and customers.
And our shareholders will ultimately be rewarded with consistent returns on their investment.
In closing we are pleased with our consolidated results for fiscal year 2019, the strategic and financial benefits of having an expanded and more diversified product portfolio have translate into more consistent earnings results and are now driving incremental growth in our business as always we are committed to outperforming in the marketplace.
These delivering on our promises and maximizing value for our shareholders and customers in fiscal year 2020 and beyond.
Thanks, again to the thousands of Winnebago industries employees and team age, which make our jobs as the messengers on a day like today, a privileged to have I will now turn the call back over to the operator for the QNX session. This morning.
Thank you.
Turning to ask a question you and need to press star one on your telephone.
So its while your question.
Okay.
Please standby bile, while we compile the culinary roster.
Our first question comes from Craig Kennison Baird. Your line is open.
Hey, good morning, Thanks for taking my question and for the thorough overview of the business here question on the promotional trends the press release called out sales allowances in the towable business, which affected margin. It was my impression that Grand design did not discounts. So can you confirm those sales allowances.
Tied to Winnebago branded Towables.
Good morning, Craig. This is Mike I think your assumption there is correct and that the promotional pressure that we've seen on the business has.
Effected the Winnebago branded RV products more than our Grand design RV products.
Thanks, and then Brian I think.
If my calculations right you had an extra week in the quarter any anything it first of all is that true and second of all are there any implications for margin that you would call out.
Yes. It is true Craig we did recognize this year, our 50 Threerd week and.
Took place in fourth quarter.
There is not immaterial impact from that extra week, we believe and neither the topline frankly or in the leverage equation I think we manage that 13 week period with our dealer network much like we would have just.
Managed a 12 week period.
And time the sales accordingly, so we evaluated that of course and concluded that there was not immaterial impact from that additional week.
Got it and then Mike finally.
Kind of a bigger picture question here, but.
What's your vision for Winnebago as the RV market embraces more digital solutions and thinking smart Rvs are the internet of things for our view I'm curious if you think winnebago needs to develop some of these platforms on its own.
Or would you consider kind of partnering with the supplier base.
Who might be able to build things that could scale across other manufacturers. It seems like a tough call given youre your scale, which is strong but not the largest in this space.
Yes, Thanks again, Craig for the question.
I think my answer in some ways is all of the above meaning that I think largely.
Around technology that emerge as the is applicable to the industries we compete.
We will largely be an integrator versus an inventor of most of that technology, and we will work with suppliers and other key partners to.
Apply and adapt that technology to our products and hopefully away that gives us a competitive advantage in not only the way that the products operate in the way the consumer engages with those products, but in many cases the information that's generated because of these emerging technologies and how you can use that information.
Two.
Deliver more value for the consumer going forward so.
We have created an advanced technology group.
For the purposes are working on what we call horizon, two and horizon three technology application.
Oftentimes, you'll see the business units in a company be a little bit more risk averse in the short term with their R&D and engineering spending.
Because they have a responsibility and the appetite for monetizing those engineering expenses and getting a return on them quickly. So really the the creation of that particular particular group.
Is intended over the next decade to allow us to leapfrog.
At times, our competitors with.
Hopefully technologies that we can apply so so yes, great question. It's one that we're obviously working on it constantly aware of but.
Well event or hopefully innovate a few things ourselves, but we'll have to have a network.
Have a good strategic partners that can create.
Our own digital experience for our customers going forward.
Thank you.
Thank you and our next question comes from Scott.
With CL King your line is open.
Good morning, and thanks again for taking my questions.
Good morning.
Maybe just talk about.
The delta between.
Trying to smooth that we're really what's the true order pattern. This year for Grand design Towable business. Your retail seems to be accelerating to the upside that you are up 17% for stat surveys.
Through August and.
Obviously, the the increasing capacity it's helped you.
Push through more units, but what I'm trying to get out is our dealers ordering one for one at this point in time right now for the a grand design product.
Scott Good morning, this is Mike.
Well, let me let me address first of all the.
The retail pattern and trend that.
We continue to see on Grand design, even extended into our first quarter fiscal year 2020 continues to be very solid.
Running materially higher than what the towables industry retail trend.
Appears to be so we are pleased to see that.
Their business continues to have that momentum in the market.
We mentioned in the call that we have continued to add capacity over the last several years to keep up with increased demand for that brand and some of the online capacity that was annualized and available to us in fiscal 19 was very helpful to working there their backlog into a.
A more appropriate place than it had been in previous years, where it was extremely elevated in some cases to elevated in terms of timely delivery.
The Grand design business to year to the latter part of your question does continue to see good retail replenishment order activity from their dealers.
As you know we just completed the the open house event, where they also were able to collect a number of additional orders as well, but I would I would say that the balance between retail replenishment orders for Grand design and those long term stocking orders that they would have collected at events like open house.
We have begun to balance and we.
We see their current backlog at the end of Q4 as one that is.
Very healthy for the opportunity that we have ahead in 2020.
Got it and moving onto motorized.
You talked about the move from Oregon to Indiana I'm sorry.
Well for for the motorized.
Diesel product.
What was the impact in the quarter to the negative side and maybe just remind us again.
The savings and the benefits that could potentially hit in 2020.
Yes got this is Brian .
Impacted Q4, specifically was relatively neutral so the expenses, we incurred restructuring relocating et cetera, we're basically offset by the savings. We think we generated upper 2020, we think there's going to be about a 4 million dollar favorable year over year.
From that item.
Got it and then just lastly, the class B side.
You talked about better availability of chassis.
On the sprint their side you, maybe just talk about.
Is that process completed I know that you.
At recent events, Mike you've talked about some other issues with.
Delivery issues for from the supplier or we all squared away with that or or are there still some residual.
Headwinds that with we have to contend with.
Yes, Thanks, Scott for the question.
Very clear here in case that specific supplier is listening on todays call. The situation has improved but it is not completely result, we continue to work through.
Supply availability issues in terms of timings.
And.
100% accuracy of the specifications of those products.
Improved.
During the quarter and we believe we have a get well plan with that supplier that we continue to work.
But I will tell you when we did not go into deep detail during the call for any of our prepared comments about.
The loss of revenue opportunity and the significant dollars that we spent in rework of those chasses in our Q4.
The loss of revenue opportunity in Q4 on class fees was probably eight figures on the top line and we spent seven figures of rework expense in Q4, just around this specific issue and so no. It is it is something that is very top of mind that being said.
Our class B team in the Winnebago branded motor home business is doing a fantastic job of.
Getting enough chassis is to the market across the various class B brands in order to effectively move our share higher in the market I believe our share now is above 40% in some of the recent stats that I've seen and though we continue to move into right direction.
Got it Thats all I had thanks again.
Thanks Scott.
Thank you and our next question comes from Steve O'hara with Sidoti and company. Your line is okay.
Yes, just thanks for taking my question I guess I'm just curious about.
Two things first.
The outlook for rock, Chris scrap itself.
Where that stands.
Are you I believe we're in the middle of the Capex program, there and your expectations about.
Growth in that market.
Do you think you could exceed the market growth given that expansion.
And then just relative to motorized.
I mean class a came down again pretty pretty sharply in terms of the are very sharply in terms of the.
Deliveries and I'm just wondering.
Maybe a Devil's advocate.
What's the benefit of maybe trying to turn that business around rather than just.
For the resources into Neumar, when that's acquired thanks.
Yes, Thanks, Steve Let me address the first question first Chris craft.
The business has performed well since we bought it in June of 2018.
They have exceeded not only our internal M&A models that we used during the process.
But they have exceeded.
The growth of the the industry in their particular segment, which is essentially 20 to 40 foot fiberglass outboard and serve drive boats. They have a very solid multi generational product pipeline and plan in front of them I talked about the GT launch product that they've been in the process of rolling out.
We have a number of new boats coming in 2020 in 2021 that will continue to extend and deepen the Chris Kraft liner.
We have been very diligent and careful about the capacity expansion project in Sarasota working with some of our outside partners. We have not broken ground on that we have been very careful in terms of getting the design and the plan of that plant right and we will occur in the very near future begin to move towards a construction phase there.
Sure.
It is I believe only around 80000 square feet, which is materially important for the Chris craft business, but it's not a huge huge space when compared to some of our other capacity expansion projects.
Let me transition to your questions about the Winnebago motorized health across the line. We certainly continue to perform well in class fees. We have struggled in class A's and classes has been a bit of a mixed bag through 2019.
As I look at our backlog going forward.
At the end of Q4, our backlog was was really in good shape on classifieds and our class C backlog was actually twice as high at the end of ethylene team as what we had at the end of F. 18 part of that is because some of these chassis.
From that supplier that reference we've been struggling with.
Do affect some of our class C shipments. So some of our shipment revenue on classes has been materially affected by the chassis supply issue.
The class a segment is where.
We have been struggling.
Impart because of what we've done to ourselves with a diesel transition from now Oregon to Iowa will come online with our our new production of diesel in May or June of this 2020 year.
But our eight gas business has not been as healthy as I would have liked.
As you can imagine as we integrate that new Maher brand, we will be having significant conversations between our neumar business and our Winnebago business about how we can complement each other in the class a category with those two brands Neumar has momentum, but as a luxury line Winnebago does.
Not have momentum in that particular segment is working on some things to improve that but we will work very carefully to try to create the right mix across both of those brands in the class a category. So that we can remain competitively relevant going forward. So.
Let's do to view to pickup on that the and I hope those comments help.
They do thank you very much.
Thank you. Our next question comes from Gerrick Johnson with BMO capital markets. Your line is open.
Hey, good morning, you caught input costs as a headwind both margin to margin in both segments.
We're seeing those materials use seem to be dropping your price new pretty quick inventory turns. So just wondering when you start to see that.
Headwind turn into a tailwind.
Yeah, I don't know that we see a turning into a tailwind fairly Eric.
The tariff environment. The general inflation environment is such that it has caused increases broadly speaking for the industry and thats as I mentioned been largely offset through.
Cost savings initiative.
Negotiations of course, with our suppliers and ultimately with pricing so.
We make sure that we can over the long term cover cost increases with that pricing activity, if necessary and we can offset it with the other items, but I don't I don't see it.
Reversing Ana save for some pretty strong trade resolution.
And then in the event that that trade dispute is resolved with China in full for example under that scenario would.
Only be then ongoing conversations with our suppliers remember that we don't by any of the the impacted material directly with all its all through our vendor network and so there would be that a time period, where that would need to settle out so to speak but.
Unless there is a pretty dramatic shift in trade policy.
I don't anticipate in 2020.
Any tailwinds as you referred to it.
Okay. We're just looking at the input costs were seeing steel down aluminum plastic town and wondering why that's not coming through for you guys.
Yes from a spot price perspective.
Sure.
Yeah, I think if you look at our view of Q4 versus Q4, specifically there is.
Not on our side because of our negotiation last year that we're not seeing that kind of reduction year over year.
Okay. Thank you.
Yep.
Thank you and our next question comes from Michael Swartz with Suntrust. Your line is open.
Hey, guys good morning.
Good morning.
Just to clarify clarification questions first off.
The reported EPS and EBITDA of I guess it was one zero won in 50, almost $51 million respectively.
It does include the costs related to Neumar.
Due diligence as well as any costs related to the reconsolidation of <unk>.
So production, Iowa correct.
That's correct.
So we the one on one includes those costs, we called out that the new more due diligence costs, which is we don't have any transaction costs. Obviously, we haven't closed deal yet, but the due diligence costs, we called out as were two cents that are included in the 101.
Okay, Perfect and then maybe Brian just a little more color on the accounting correction that you talked about I think as it relates to the motor home business did I hear correctly that that was negative 10.8 million in the order that you were trying to call out that you may have benefited in prior quarters from that but I did I hear.
Correctly.
Yeah, you did so just a little more color we perform our physical account for working process inventory once per year.
Yes, and the ordinary course, the closing our books and as a result of that count.
Which we perform fourth quarter, we identified we needed to increase cost of goods by 10.7 million.
That cost Q4 costs costs to be higher so you're interpreting that correctly when they otherwise would have that but to be clear again 2019 fiscal year. The full years correctly stated.
Okay. Okay. That's great. Thank you.
And then just I guess.
When I look at the backlog for towable in and certainly Directionally. It's it's been moving in a very healthy direction. If I look at the implied intra quarter orders and told I mean, it was a large jumped this quarter I think Europe like 30, 435% year over year fixed how does that play into your thoughts about dealers.
They're ordering and stocking patterns Abid, just the overall health of your dealer base.
Yeah, I think the health of our dealer base across each of our business slightly varies based on the maturity in the current vitality of the brand certainly I think that.
The Grand design dealer base has been able to to produce the momentum on that brand to date and has the potential and capacity to continue forward as well, we do believe that even in a period, where inventory levels appear to have been largely reset maybe not all the way, but largely reset that.
Dealers are continuing to be very careful on selective with the brands, but also the models and the amount of inventory that they choose to carry on their lots and so as I mentioned.
An answer to a previous question, we believe that the.
The large stocking order backlog process that was.
You used by many of the Oems during the later cycles of the recovery in 2015, 16 and 17, especially.
Has has shifted a bit more to a natural reorder process by the dealers and.
It really depends sometimes you have to take the new products out of this discussion as well and talk about okay.
Are you are you introducing a new product to the market and and setting new inventory on the shells are or have you annualize that in your now in a in sort of us a steady operating state so.
The Grand design team continues now to refresh their product line.
They have not introduced a new sub brand for a little bit more than a year. Now. So you are starting to see a bit of a settling of orders into more of a replenishment process and again as I mentioned, we're comfortable with the orders that we havent hand, we've been very comfortable with the retail that we've seen in the market.
On that brand and.
The open houses that was a very solid order production.
Event for for Grand design.
Okay, maybe one one last question if I can there was news out I believe last week earlier. This week that a one of the large RV transport companies has elected to shut down.
Any thoughts on how that maybe you you werent using them to the extent that some others were and some of your dealers were but any any thoughts on how that might impact you or timing of deliveries or cost of deliveries within the industry overall.
Yes.
It's a good question and I would say a number of our businesses are not impacted by that development at all.
One of our customers camping world that we do business with and.
In our Winnebago motorized business, especially.
Well, we'll possibly see some impact with the.
The transport that we've seen but it should be nothing material in terms of our financial results or our ability, we think to be able to get market. It is you know again I'm not in the middle of this personally but it is our thought.
That many of these independent contractor drivers well potentially be.
Shifted.
With their vehicles over to some of the other transport.
Companies within the industry. So for Winnebago industries, we became aware of it very quickly.
It's not impacting our business on a day to day basis, we don't and anticipated the much have impact in the future and I guess like with any other.
Capitalist market.
You will see someone step in and Viant compete for that particular business within the industry. So there may be a transition period, but.
And we'll do everything we can to make sure it doesn't.
Impact us to up to a large degree.
Okay, great. Thanks, a lot.
Thank you.
Thank you and our next question comes.
Craig that is county with Citi. Your line is open.
Hey, guys. Good morning, its spread whiteman on for Greg I think in the prepared remarks, you had talked about expectations for a low to mid single digit retail decline in.
2020, I believe you said that was for your fiscal year.
You also talked about how you thought the RV forecast could be a bit conservative and those tend to be calendar estimate. So can you just help us rationalize the two different time periods and any comments on more of an apples to apples basis would be really helpful.
Yes, Thank you as you're aware and I won't be able to precisely answer your question, but as you're aware our fiscal year runs from essentially September through August and you are correct and RV A's forecast is more on a calendar year 22020 basis I guess.
I know other companies Oems and suppliers do this as well, but we've done some of our own internal modeling here at Winnebago.
Around the inventory levels in the field the that historical but also some of our own thoughts on on dealer inventory turn levels in terms of where they want to run their business going forward and.
Our estimates are showing that if we can see what I would call moderately okay retail load to low single low to mid single digit declines for 20.
20, our fiscal year.
In fact.
It may be possible for the industry to have flat wholesale shipments during that specific time period.
We are now entering here into the next several months some pretty significant shipment declines that were experienced a year ago by the industry as dealers essentially turned off the spigot. So.
Listen.
My four years that at Winnebago, I think I've personally been accused of being one of the more conservative prognosticators of industry shipments in retail amongst our peers add in this case.
We're probably a little bit more moderately.
Dresses than some of the other.
Some of the other stakeholders just because we think of dealers can continue to get their feet under them from a confidence level on the retail side in customers continue to show up in their stores and have an appetite to buy.
We think that they'll they'll they'll stabilize their inventory levels about where they're at today, which means that.
Bill Bill in some cases continue to to even look at the stocking backup a little bit. So the reconciliation between the calendar year in our fiscal year.
I haven't done that particular math, but.
Listen our hope is that.
If the if the retail environment can stay solid that dealers will continue to gain confidence overtime.
Sure, but that's fair if you could just dig into the towable profitability in the quarter. There was a pretty big change in the year over year trends versus last quarter I know the release highlighted some input costs and then also sales allowances, but could you just size the relative impact if those two items and then maybe do a little bit of a deeper dive in the.
Profitability put yourself there this quarter.
Yeah, I don't think.
We're going to disclose the specific details underneath that.
The cost input increase as we talk a little bit about earlier in terms of the general inflation and the timing with which.
The supply.
The vendors in the industry have pushed through those increases.
In many related to trade policy and so the cost input increases generally speaking are the biggest driver.
The other side of it or the other part we mention is the allowances on there was a question asked earlier on has that Grand design. We thought we understood Grand design does not do discounting that that's correct. They don't I'm on the other hand, the Winnebago Towables business Im doesn't have the theme cachet with the dealer network and so they're not in.
The physician that Grand design is and they are because of the industry dynamics right now.
Facing.
The higher allowances to remove the product on the lots and so it's really those two impacts the cost increases as well as Winnebago Towables allowances that has the greatest impact on the margin.
Okay. Thank you.
Thank you. Our next question comes from Bret Jordan with Jefferies. Your line is open.
Good morning, this and Mark Jordan on for Brett.
Most of my questions have been asked here today, but I was wondering kind of big picture question. If you could talk about the company's brand portfolio strategy going forward, maybe should we see some additions in RV marine or maybe other adjacent markets.
Yes, good morning, Mark This is Mike.
That's a topic, we will certainly a touch on as well in a couple of weeks at our Investor day event.
We generally do not publicly comment on.
Business development plans or specific targets going forward.
But I would tell you that two things one we are extremely pleased with the four brands that are active in the marketplace that we haven't our portfolio today Winnebago brand design.
Chris scrap and I should say in a few weeks.
Neumar brand as well, we currently don't on that so we should be clear about that but.
Those four brands come mid November we believe our a tremendous platform from an outdoor lifestyle standpoint to attack the.
Mid to premium side of the industries. We competed.
I think most.
Stakeholders that we interact with are beginning to get the business portfolio strategy that we're putting together around premium brands premium products premium leadership teams premium relationships with dealers premium customer experiences, including the service side and on.
Understand that that's the type of portfolio that we're putting together and so if you look at either the core RV market that we're in today predominantly or other adjacent outdoor lifestyle markets that we could enter and one we've already entered and marine.
I would tell you that our eyes are on the.
The premium side of those markets in terms of.
We've said this before but in a very simplistic good better best context, we're very much focused on better and best and so our business development efforts will definitely.
B B b targeted at that those areas of the industries.
But that's not to say that we don't have other ideas for how we can grow our portfolio, our topline and our bottom line in the future as well. So yes, we're very pleased with the brands, we've been able to pursue and.
They are all unique all present, a unique value proposition to the marketplace, but they all have golden threads around their focus on product quality.
Valued the innovation and superior customer service and experiences and and as long as we can continue to put together a portfolio like that we believe there is incredible value from a synergy standpoint from an operating standpoint from a culture standpoint.
You've been working with suppliers and dealers around the portfolio like that that will continue to hopefully produce great outcomes for us financially and in the market in the future.
Great. Thank you very much.
Thank you.
Our next question comes from Brendan Raleigh, with Northcoast Research Your line is open.
Good morning, most my questions have been asked as well I guess I would one could you comment on Euro order trends that open house I'm not sure if you touched on that.
Into a with the cleaner dealer inventories heading into all your fiscal year 2020 and.
Expectations for.
Improved retail sales year over year on do you would you expect promotional activity to trend lower in fiscal year 2020, given some of the Tailwinds you have going for you. Thanks.
Yes. This is Mike I'll I'll answer, though so we did make a specific comment in the script about our open house results.
We will not sure those results by brand, but at a consolidated Winnebago industries level for both the Winnebago end. The Grand design brands are open house orders were up 11% year over year at that event, which we were very we were very pleased with.
In terms of your second question remind me again, what that one was that was the is the promotional activity promotional activity. Thank you. It is.
I think beginning to settle a bit.
I mentioned late in the the earnings call that we believe that the in the RV market Theres, a nice equilibrium right now between the dealers in the Oems.
In terms of I hate to use the word power, but in terms of.
One of a portion of hole and really the good brands with the with good businesses.
Our gaining favor with the dealers and the brands that do not have as healthy a product line from an end customer standpoint, and potentially are not serving the dealers as well from a parts and service standpoint, our of potentially falling out of favor with dealers within the industry, we need to make sure that we have all of our businesses on the right.
Outside of that equation.
But a lot of the promotional activity as well in the last year. We believe was spent by both the dealers and the Oems dealing with aging inventory and previous model year product 2018.
Ill now 2019, and the the amount of aging inventory, especially excessively aged inventory in previous model year inventory continues to come down at a nice pace based on the information that we can gather from our inventory finance partners and so we believe you will start to see any promotional spending shift from.
More friendly aged inventory reduction cited the business to driving.
Current model retail going forward.
Great. Thank you.
Thank you and Im showing no further questions I'd like to turn call back to Mr., Steve Stuart Director of Investor Relations for closing remarks.
Great. Thank you and thank you everyone for joining US today, we really appreciate you taking that time out of your busy days, who joined US This morning.
And we do look forward to seeing and speaking with many of you not only throughout the remainder of the quarter, but also again as both Brian and Mike mentioned, our Investor Day in New York City on November six.
Thank you and have a great day.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect have a great day.