Winnebago Industries, Inc. (NYSE:WGO) Q1 2024 Earnings Call Transcript

Winnebago Industries, Inc. (NYSE:WGO) Q1 2024 Earnings Call Transcript December 20, 2023

Winnebago Industries, Inc. misses on earnings expectations. Reported EPS is $1.06 EPS, expectations were $1.17. WGO isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to the Q1 Fiscal 2024 Winnebago Industries Financial Results Conference Call [Operator Instructions]. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker, Ray Posadas, Vice President of Investor Relations and Market Intelligence. You may begin.

Ray Posadas: Good morning, everyone. And thank you for joining us today to discuss our fiscal 2024 first quarter earnings results. I am joined on the call today by Michael Happe, President and Chief Executive Officer; and Bryan Hughes, Senior Vice President and Chief Financial Officer. This call is being broadcast live on our Web site at investor.wgo.net, and a replay of the call will be available on our Web site later today. The news release with our first quarter results was issued and posted to our Web site earlier this morning. Before we start, I’d like to remind you that certain statements made during today’s conference call regarding Winnebago Industries and its operations may be 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 SEC filings, which I encourage you to read. With that, I would now like to turn the call over to our President and CEO, Michael Happe. Mike?

Michael Happe: Thanks, Ray. Good morning. And as always, thank you for your interest in Winnebago Industries and for taking the time to discuss our fiscal 2024 first quarter results. I will provide an overview of performance during the quarter, then pass the call to Bryan Hughes to cover our financial results in more detail. Following Bryan’s comments, I will return and offer some closing thoughts before the Q&A portion of the call. As we entered our fiscal 2024 year this past September, the outdoor recreation market in North America continued to face numerous short term challenges. Consumer confidence was unsteady given macroeconomic factors. Affordability of the RV and boating lifestyle, while still competitive with other forms of leisure travel, had become difficult for potential new customers.

And dealers were aggressively managing inventory by constraining inbound wholesale shipments. We stated during the October earnings call that our first two fiscal quarters in 2024 would face formidable headwinds, especially as it related to dealer appetite for new RV and marine products, and that we were hopeful our last two quarters in fiscal year 2024 would show real improvement relative to an anticipated future 1:1 retail ratio to wholesale replenishment rate developing within the channels. The projection for fiscal year 2024 has proven true three months into this first half period. Retail demand is generally in line with our projections, if not a little better than anticipated in Barletta boats and Grand Design towables. While dealers were very selective in Q1 with what they brought in from our premium brands and have done an excellent job in driving their inventories lower, we believe continued strong wholesale constraints during a seasonally lighter retail period of the year in December through February and subsequent further reduced production by our businesses over the holidays will also have a similar impact on Q2 financial results as well.

Bryan Hughes will discuss this Q2 outlook in more detail later in the call. Despite these challenges, the Winnebago Industries team remains focused on two core objectives; A, the preservation of solid profitability and a strong balance sheet in the short term, balanced with the reinforcement of robust market positions, lot and retail share across our outdoor portfolio; and B, our commitment to amplifying investments that nurture the long term health, vitality and value proposition for our brands and the enterprise as we prepare for what we believe will be a strong rebounding outdoor economy in the back half of calendar year 2024 and especially into 2025. Our fiscal year 2024 Q1 SG&A numbers include elevated investments in engineering, digital asset development and increased data and IT capabilities.

These initiatives are incremental to historical spending and intentional. Overall, we maintain our bullish position on the future of the RV and marine industries and our brands will be well situated to participate strongly in the cyclical upswing when it occurs. Our fiscal year 2024 Q1 results demonstrate the resilience of our diversified portfolio and variable cost structure, as well as our production discipline and pursuit of operational excellence improvements. We are also focused within the Towable RV and Marine segments in addressing vital consideration surrounding affordability with multiple new product releases, while maintaining our commitment to customer satisfaction via outstanding product quality and aftermarket service. Overall, for our fiscal first quarter, we achieved $763 million in net revenues as we navigated softness in motorhome RV and marine unit sales.

Our consolidated gross margin of 15.2% was driven by strong margin performance in our Towable RV segment. Overall, we delivered adjusted earnings per diluted share of $1.06. Within the RV industry, gross unit inventories across the Motorhome and Towable segments are at historically low levels, in some cases, not seen for more than a decade, and Winnebago Industries field inventory turn rates have returned to pre-COVID status. The RV industry added unit inventory for the first time in many months during October of 2023, and we do not anticipate significant further destocking industry-wide as we turn towards spring. Dealers continue to work through model year 2023 inventory during this quieter period of the year and mitigate the cost implications of higher inventory financing rates on their business.

We continue to proactively manage our own capacity, output and costs in a targeted manner, given dynamic marketplace conditions. Importantly, our consolidated RV retail market share is showing signs of stabilization, following an anticipated pullback last year in connection with broader market focus on lower price points and further rationalization of second and third tier brand inventory. Grand Design specifically is seeing solid retail performance as we speak and has added retail share in recent SSI reports. Last quarter, we highlighted several new RV models across our organic brands, providing customers with terrific value at attractive price points for premium products. The Grand Design Serenova and Reflection 100 as well as the new Winnebago branded Access are examples of these introductions.

The new Winnebago M-Series trailer and Grand Design’s modestly priced luxury fifth wheel Influence are also strong additions to the model year 2024 lineups. In Q2, the Winnebago brand of motorhomes will officially launch the next generation of the popular Revel and EKKO Motorhomes. The new Winnebago Revel 44E is the next generation of the industry’s first all wheel drive Class B motorhome built on the Mercedes-Benz Sprinter chassis. The new Revel 44E boasts extended season capabilities, a Winnebago power package featuring our own Lithionics GTO battery and upgraded interior and exterior features. The new Winnebago EKKO 23B2, a Class C motorhome is also built on a Mercedes-Benz all wheel drive Sprinter chassis, boasts advanced all season features, a multiuse living space and an advanced solar lithium battery combination.

Both the Revel and the EKKO models begin shipping in January of 2024. Coming off a banner year for our Marine segment in fiscal year 2023, our marine dealers, as anticipated, began to pull back on orders in the first quarter of fiscal 2024 due to elevated inventory levels and costs. This meaningfully impacted quarter one shipments and will continue to do so even more strongly in quarter two. However, we are encouraged by the retail trends we are seeing specifically in the pontoon segment. Our Barletta business has run positive comps to date in fiscal year 2024 and continues to gain share in the aluminum pontoon segment, reaching now above 8-plus points of share in recent SSI reports. However, we are working closely with Barletta dealers, especially in the northern freshwater markets, to optimize their inventory positions as the winter months go so that they feel more comfortable with reorder capabilities as the spring season approaches.

Similar to our RV brands, our Marine businesses continue to innovate with new releases for model year 2024. During the Fort Lauderdale Boat Show this past October, the Chris-Craft brand introduced the highly anticipated Catalina 28, offering customers a center console with versatile seating configurations and boasting groundbreaking Seakeeper ride technology. Barletta has unveiled the industry’s first pontoon boat with twin engines mounted in the center of the boat’s transom, a patent pending feature. In addition, the new Reserve Lazera is a simplified decontented offering of the ultra high end Reserve and has released a refreshed year two version of the entry-level ARIA model line as well, affordability with a premium look and feel. As I have often mentioned, Winnebago Industries will continue to responsibly invest, innovate and position our businesses for long term success through the entirety of the economic cycle.

We will prioritize profitability through disciplined production and cost management, leveraging our highly variable cost structure and collaborate closely with dealers to align on win-win inventory approaches to the market. Winnebago Industries remains well positioned to further strengthen our enterprise capabilities, capitalize on future growth opportunities and achieve long term shareholder value creation goals. With that, I will now hand this over to Bryan Hughes.

Bryan Hughes: Thanks, Mike, and good morning, everyone. Before I begin, I would like to refer you to our earnings release document as well as our earnings supplement document that are on our Investor Relations Web site. On past calls, I have verbally reviewed all the key financial results and I will refrain from doing so today and to improve efficiency we’ll instead focus solely on key drivers of our performance. Our first quarter consolidated revenues reflect a decrease of 19.9% compared to the fiscal 2023 period, driven by lower unit sales related to market conditions, product mix reflected by lower average selling prices and higher discounts and allowances across all segments, partially offset by carryover price increases related to higher motorized chassis costs.

By extension, our gross profit for the quarter decreased 27.8% year-over-year but we are proud to have delivered 15.2% gross profit margins despite the deleveraging impact of slowing sales, which was the greatest driver of our margin decline and higher discounts and allowances. Our ongoing profitability is the result of our variable cost structure, the strength of our relationships with our supplier partners and dealers and the relentless pursuit of operational excellence across each of our businesses. Maintaining healthy gross margins enabled delivery of EBITDA margins of 7.1%, which includes investments in our advanced technology, digital transformation and IT capabilities. I’ll now cover our performance by segment. Revenues for the Towable RV segment were down 4.8% compared to the prior year as strong unit sales growth and lower ASP travel trailers contributed to an unfavorable product mix.

Towable RV segment adjusted EBITDA was down 8.8% versus the prior year period. Adjusted EBITDA margin was 10%, down 50 basis points year-over-year, primarily due to deleverage and new product start up costs. Revenues for the Motorhome segment were down 28% from the prior year. This decline was driven by lower unit sales as a result of current market conditions and a higher level of discounts and allowances, partially offset by favorable product mix and price increases related to higher motorized chassis costs. Segment adjusted EBITDA margin was 6.4%, down 440 basis points versus the prior year due to volume deleverage, higher discounts and allowances and some operational inefficiencies. As Mike shared during our prior earnings call, we are excited by the launch of Grand Design Motorhome and look forward to seeing those new models begin to enter the market later this fiscal year.

Our investment behind this initiative is reported in the corporate all other category within our financial results, and therefore, will not be dilutive to our Motorhome RV segment until Grand Design Motorhomes becomes operational. Overall, we anticipate that the bottom line impact to Winnebago Industries will be dilutive to our pretax income by about $10 million to $15 million throughout fiscal year 2024 due to sizable start up costs with limited revenue at the initial launch. However, we believe this is a powerfully accretive strategy and financial opportunity for the company in future years. As expected, our spending was approximately $1 million in Q1 and we anticipate ramping that investment to between $4 million to $5 million by Q4. Keep in mind, we expect our investment to be accretive to our fiscal 2025 results.

Let’s turn to our Marine segment. Revenues were down 33.5% from the prior year as a result of a decline in unit volume related to slow dealer demand and an elevated interest rate environment and higher discounts and allowances, partially offset by carryover price increases. Marine segment adjusted EBITDA margin of 8.2% decreased 590 basis points versus the prior year, primarily due to volume deleverage but also impacted by higher levels of discounting. Backlog for the Marine segment declined 55.9% compared to the first quarter of the prior year due to cautious dealer sentiment this off-season as compared to last. Moving now to the balance sheet. At the end of the quarter, Winnebago Industries had a net debt-to-EBITDA ratio of approximately 1.2 times, which is at the middle of our targeted range.

Maintaining a strong balance sheet is core to the Winnebago Industries’ investment thesis and has continued to allow us to execute our balanced capital allocation strategy, which prioritizes digital and strategic investments in our business like the opening of the ATG Innovation Center, for example or strategic acquisitions like Lithionics most recently, while also returning significant capital to shareholders. During the first quarter, we executed share repurchases of $40 million and increased our quarterly cash dividend by 15% to $0.31 per share, reflecting the confidence we have in our ability to profitably grow revenues, capitalize on new opportunities and gain market share over the long term. These actions further underscore our confidence in and our commitment to the long term strength and trajectory of our business.

Before turning the call back to Mike, I would like to provide more context on the previous comments Mike made about our upcoming second quarter. We anticipate Q2 consolidated sales are likely to be reduced from Q1 levels. This has historically been the pattern from Q1 into Q2 due to production utilization over the upcoming holiday period, and we expect that to be the case this year as well. This also reflects our continued efforts to maintain a very disciplined approach to our production output during a time when dealers are steadfast in minimizing inventory during the off season months and as evidenced by the lower backlog with which we ended the first quarter. This preference by the dealer network this year has been further influenced by the higher interest rate environment and the corresponding high carrying costs that the dealer network has been experiencing.

Negative dealer sentiment related to current inventory levels is most acute in our Towable RV and Marine businesses. And therefore, our current expectation is that the sequential sales performance for our Towable RV and Marine businesses will reflect this dealer sentiment most notably, and will produce lower sales both sequentially from Q1 to Q2 as well as year-over-year for Q2. We are currently anticipating that Q2 profitability will be impacted by the modest sequential reduction to sales in Q2. We do not currently expect sales incentives to change materially in Q2 from what was experienced in Q1. These prior comments are specific to Q2. As we look ahead to the back half of our fiscal year, we continue to expect dealer ordering patterns to return to a relationship where one retail sale will produce one wholesale shipment.

Retail activity from the last several weeks and really the last few months continues to support a forward looking estimate of 350,000 retail units for the RV industry in calendar 2024 and is consistent with the most recent RVIA estimate of approximately 350,000 shipments. With 2023 expected to produce shipments in the range of 300,000 units, the current expectation is that the industry would therefore realize an approximate 17% increase in shipments for calendar 2024. We expect that the back half of our fiscal year will therefore realize a pro rata portion of this expected increase. With that, I will now turn the call back to Mike to provide some closing comments. Mike, back to you.

Michael Happe: Thanks, Bryan. And now a few closing comments before we get to the Q&A session. As many on this call are aware and as Bryan just stated, the RV Industry Association recently revised their expectations for calendar 2024 RV shipments to a midrange estimate of 350,000 units. We are aligned with that projection at this time and believe this number will closely correlate with calendar year industry retail as well. As we assess the implications of the upcoming 2024 retail season, we will provide the investor community with an update to our long range financial and operational targets, originally provided during our 2022 Investor Day, during our second quarter earnings call in March. On our last earnings call, we announced significant news concerning the pending launch of a Grand Design Motorhome lineup, offering a strong complementary set of products to our current Winnebago and Newmar Motorhome brand portfolios.

Grand Design continues to reinforce its reputation as one of the most successful RV brands ever created, receiving the RV Dealer Association Dealer Satisfaction Index Award for every one of its core product brands this past fall, an honor they have never failed to receive. We have no doubt this excellence will carry on to their new motorhome lineup, which will be unveiled later in fiscal year 2024 with anticipated shipments beginning in our fiscal fourth quarter. Also in the first quarter, Winnebago Industries opened our Advanced Technology Group’s new innovation center, which will serve as a center of excellence for Horizon 2 and 3 engineering efforts within the company. In the years ahead, the center will support the design of a new generation of RV and marine products that will harness and apply emerging technologies.

Our integration of Lithionics Battery continues to go well roughly eight months following this important strategic vertical technology acquisition. Lithionics is expanding its electrical products offering, penetrating the Winnebago Industries’ product portfolios with its exciting battery packs and battery management system offerings, expanding business with other outdoor mobility OEMs and preparing its catalog of products for application into the marine industry. While the top line sales impact to Winnebago Industries from Lithionics will be modest for a few years, the profit dollars and yield impact will be more significant, in addition to the value of building a knowledge base here at the company on portable power technology across our businesses.

Very importantly, Winnebago Industries released last week its fifth annual corporate responsibility report. The report aligns with the global reporting initiative, Universal Standards, and features an index aligned with recommendations from the Task Force on Climate related Financial Disclosures as well as the company’s first Sustainability Accounting Standards Board’s Index. Highlights of Winnebago Industries corporate responsibility progress include; submitting the company’s first CDP climate change questionnaire, representing another large step toward enhancing their climate related disclosures; progressing towards the company’s waste reduction goal, improving to 62% diversion from landfills across our enterprise; initiating a strategic partnership with the Nature Conservancy to promote conservation and protect the outdoors; a 20% reduction in the company’s absolute Scope 1 and Scope 2 greenhouse gas emissions since 2020; reduced total recordable incident rates by 16% compared to fiscal year 2022; provided more than $3 million in financial product and volunteer contributions to the communities Winnebago Industries serves in fiscal year ’23, an increase of 20 times in giving since 2016; introducing new innovations that will support sustainability efforts, including the all electric concept boat from Chris-Craft, further upgrades to an all electric RV prototype, the ERV 2 and the acquisition of a lithium-ion battery manufacturer, Lithionics Battery; increased Board gender and racial diversity from 14% women and no directors of color in 2015 to 30% women and 20% directors of color in 2023.

Lastly, I would like to extend my gratitude to the entire Winnebago Industries’ team of employees for their continued hard work and dedication. They have faced a significant amount of change in the past many years and continued to demonstrate resilience and agility as we navigate very dynamic market conditions. We have a tremendous team here, and I wish each of them and their families a safe and happy holiday season, and those same wishes are extended to all of you listening in on this call as well. That concludes our prepared remarks this morning. I will now turn the call back over to the operator who will open up the line for your questions.

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Q&A Session

Operator: [Operator Instructions] And our first question is going to come from the line of Michael Swartz with Truist Securities.

Michael Swartz: Maybe just to drill down into the second quarter commentary that you made. I mean, obviously, it sounds like revenue will be down sequentially versus the first quarter, which I don’t think is a big surprise, given it’s a seasonally smaller period anyway. But I just wanted to maybe dig down on the margin outlook and maybe even EPS. I mean, are you trying to get across that sequentially, EPS will be down quarter-over-quarter?

Bryan Hughes: With the deleverage we’ve experienced that’s been the biggest driver by far of our margins versus last year and even sequentially. And as I said in the prepared remarks, the allowances and discounts aren’t going to be meaningfully different. So I think you should interpret the comments as such that the lower sales volume will deliver through deleverage a lower profit number. Obviously, we’re doing a lot of things to manage the expenses, the cost. We leverage our variable cost structure to the extent that we can, but that’s the message we’re conveying.

Michael Swartz: And then second question, and I think, Mike, you were discussing this in the preamble. Just in terms of the retail environment, maybe in the past 30 to 60 days, I sensed, I guess, a little more maybe optimism versus where we were when we last talked back in October. Could you just give us maybe a little more flavor or color what you’ve actually seen on the retail environment, both in the RV and the marine industries?

Michael Happe: As my comments indicated, we aren’t seeing a lot of surprises in the retail environment right now. It has generally been tracking on both the RV and marine side to the internal projections that we have had for both calendar ’23 and sort of the trend line that’s headed towards, obviously, calendar ’24 here in the coming weeks. I did mention that we are seeing positive retail from both Grand Design RV and Barletta. And when I say positive, I mean positive over same weeks the year prior, so truly positive. The other businesses are, again, trending as we expected and are gradually improving in a comp standpoint versus the year prior. As Bryan and I both indicated, if we are to reach that 2024 retail level of 350,000 units approximately, we’ll have to gradually see an overall trend of RV retail comps closer to ultimately flat to maybe later in calendar ’24 positive versus the year prior.

So no surprises on the trends that we’re projecting internally. And the bigger challenge in the current short term is dealers just continuing to very carefully manage their own inventories.

Operator: And our next question is going to come from the line of Craig Kennison with Baird.

Craig Kennison: I wanted to follow up on Mike’s last question. Just it would seem to me that RV affordability has improved significantly, given model year 2024 prices and the move in interest rates. I’m just curious if you’re hearing anything from your channel partners that suggest any movement by consumers based on that math.

Michael Happe: I think any movement to that end would be very subtle at this time. We are trying to address the affordability challenge in the marketplace for new consumers of RVs and boats through a variety of tactics. Certainly, some of that includes support for units in dealer inventory that are either aging in place or may be particularly pressured from a price standpoint. We have also introduced, as we said in the script, several new models within a few of our brands that we believe will be more attractive to consumers shopping for lower price points. And then the last thing that we’re definitely doing is we are passing on the benefits of reduced inflation or in some cases even disinflation to — deflation to our dealers as well.

Our businesses are being fair at the time where we have a bill of material that is going the right direction in terms of a lower cost of goods. Those products are seeing that benefit pass through to the dealers as well. But this time of year, Craig, retail wise, difficult to see a significant movement by consumers reacting to affordability easing in the marketplace.

Craig Kennison: And then could you comment on the freshness of dealer inventory, basically like the mix of model year 2024 units versus prior year models and how that would be compared to prior years at this time?

Michael Happe: Craig, I can speak to that. I won’t get into any specifics by brand but we feel we are in good relative condition to the rest of the industry. When we look across all of our businesses, RV and Marine, we think that less than 5% of our inventory at the end of quarter one was model year 2022. We believe somewhere in the neighborhood of 40% to 45% was model year ’23, and subsequently that means about half of our inventory was model year 2024. If you compare that to previous fiscal years at that point in time, end of Q1, we are a little bit heavier on prior model year inventory. In this case, that would be model year 2023 and a little bit lighter on current model year inventory, that being model year 2024. The numbers that I just quoted, generally, the RV numbers as part of that are a little bit lower in a positive way, meaning we have less prior model year inventory.

In the Marine side, we probably have a little bit more prior model year inventory that we’re working through. I’ve seen some notes from some of the sell side analysts that are probably on the call today that have probably done some scrapes of online dealer inventory. And it appears that we are in good shape versus the rest of the industry in terms of inventory position. So a little elevated but not anything that is causing us great consternation at this time.