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.

Bryan Hughes: We do think that, that is one of the things that will impact Q2 as well. I mentioned, as did Mike, the dealer sentiment having an impact on Q1 and ordering patterns into Q2. That’s certainly one of the things that we hear from dealers is that they want to minimize model year ’24 purchases until they see more progress industry wide on those model year ’23s on their lots.

Operator: And our next question is going to come from the line of Bret Jordan with Jefferies.

Bret Jordan: Could you talk a little bit more about the incremental SG&A investment? I think you talked around sort of engineering data, IT. Could you give us a bit more color there and how we should think about that in sort of in ’24?

Michael Happe: I’ll begin and then Bryan will probably add some additional context as well. I had felt candidly through the last month or so that the Street was modeling our SG&A a little lower than what we had been planning. Our SG&A for quarter one actually came in lower than what our management plan on SG&A was for quarter one. So the SG&A is a little bit different in its variable cost nature than really the manufacturing side of our business, and Bryan can probably speak to that a little bit more articulately than I can. But as we returned to a new fiscal year, you saw some things roll over, as one example would be the reset of bonuses for certain employees in the organization. But I’m going to speak to the specific things I referenced in the call, engineering being one of them.

We are spending intentional dollars around the development of new products, around work in the advanced technology area on topics like electrification and even within our businesses. Our businesses are keeping their foot to the pedal in terms of new products that will be introduced later in this fiscal year or future fiscal years. I talked about digital assets. The world is changing from a brick-and-mortar analog environment to more of an online digital world. And we are investing in numerous tools within our businesses that will help us compete effectively in the future from a digital engagement standpoint with consumers. And lastly, IT systems. Winnebago Industries, when I joined the company now almost eight years ago, just was not modernized in the way we did business and particularly the foundation of IT systems.

And we continue to travel along that path and we are making intentional investments in ERP systems, in customer service phone systems. We’re making investments in financial systems. We’re making investments in customer relation management systems, all with the intention of obviously modernizing the business and setting the stage for success in the future. So we probably had a little bit of a misalignment with the Street this quarter on that impact of both resetting SG&A but also adding in some of those investments, but now you guys are aware of our approach on that. Bryan, any other context?

Bryan Hughes: Yes, I’ll give you a little more context, Bret. We have historically talked about our cost structure being 85% variable. SG&A is clearly a really small part of our cost structure, but it’s much more fixed. I would use more of a 25% variable as a high level estimate. So that might help some of the modeling. We’ve also added Lithionics. Obviously, that business unit SG&A since last year, not since Q4, so not sequentially but versus last year, that’s an add as well as the purchase accounting impact from that deal. Mike mentioned the investments we’re making, all very intentional. He also mentioned the bonus plans and the variability that, that might cause from one quarter to the next. So in general, you got to also appreciate that SG&A is more subject to volatility from one quarter to the next as we deal with some nonrecurring type items as well.

So we’ll continue to provide commentary around those types of things as they occur. But I guess that would be additional context I would add.

Bret Jordan: And then a quick question. I guess in the last couple of years, the RVIA started out pretty high and ended up substantially lower, and it seems like they’ve taken the number down a little bit already for ’24. I guess it’s in line with your forecast. I guess do you think that’s substantially derisked? I guess, what would you see that could happen that would cause the RVIA number to come in 20% plus below the initial forecast as it has the last couple of years, or are they conservative enough at this point, do you think?

Michael Happe: Bret, we have members of our leadership team that participate in the process with RVIA on the market statistics committee to help set that number. And that’s a good thing that OEMs and suppliers are working with RVIA to try to come up with a collective projection for shipments. The element that comes to mind when you ask that question for me is timing. I think that the question here is when will dealers begin to feel more confident in trending towards that 1:1 retail to wholesale replenishment ratio that not only Winnebago Industries has referenced but some of our peers as well. And I think — we’re not anticipating a large retail difference in calendar ’24 versus calendar ’23. We think it will be a relatively flat environment.

And so it really comes down to channel confidence in terms of taking more inventory to put on their lots to support a healthy retail environment with consumers. And I think the timing of that sort of channel shipment flow trend will be what ultimately determines the shipment number. Certainly, if retail is positive, if the Fed cuts interest rates, if consumers feel some easing and start to return to spending in the RV and marine industries, that retail boost or energy could certainly also help deliver that higher confidence to our dealers. So I think it’s timing. And I think the RVIA shipment number is probably more balanced in terms of upside and downside at this new 350,000 number.

Operator: Our next question is going to come from the line of Tristan Thomas-Martin with BMO Capital Markets.

Tristan Thomas-Martin: Has your view on ASPs for the full year changed since last quarter?

Bryan Hughes: On the Towables side, what we’re seeing is probably a stronger shift in mix, Tristan, at least in the near term in Q1 and probably to be continued in Q2 towards travel trailers versus fifth wheels as consumers migrate to a more affordable product. I think mix will continue to have a bigger impact on ASP than what we have conveyed, and I think as recently as last quarter, we conveyed a number. On the Motorized and Marine side, pretty consistent still from what we’re seeing in terms of ASPs. The Towable ASP being much more influenced by mix versus a like for like rate reduction, we still see that probably on the rate side in the low to mid single digit decline for ASPs on Towables. So that’s on like-for-like So the mix impact that drove the reduction here in Q1, that was much larger.

Tristan Thomas-Martin: During last quarter, didn’t you say down mid to high single digits on a mix-neutral basis? So now is it down low to mid, is that what you were saying strong…

Bryan Hughes: I’d say it’s moderating. We’re seeing inflation that’s quarter-to-quarter pretty neutral at this stage.

Tristan Thomas-Martin: And then just one more thing to square. Your total shipments were much greater than the industry, at least over the two months of reported industry data. What was kind of the delta there, you versus the industry?

Michael Happe: I think we continue to — I’m assuming you’re referencing the RV industry. We’re continuing to see some benefit from the Towables business, particularly Grand Design reestablishing, I think, a solid lot share foundation. We had talked for several years, it seemed, on this influx of second and third tier brands that dealers took on during the COVID frenzy. That issue has largely gone now. And a brand like Grand Design has really worked hard with its dealers to reestablish the right share of lot from that standpoint. I would say our Newmar business has also done a good job working with its dealers to make sure that stocking inventory levels are where we think are appropriate. And so I don’t think our lot share has swung in an unhealthy way based on shipments the last couple of months.

I think it’s back to where we think it needs to be. And we’re starting to see some retail share benefits as well, we think, from some of that activity. As I mentioned on the call, particularly with Grand Design RV, their retail has not just stabilized but started to take some small ticks up in the right direction, which we think is a sign of more positive things to come in on that brand.

Tristan Thomas-Martin: I’m going to sneak one more in if that’s okay. Can you remind everyone your stance on building open orders?

Michael Happe: Well, our stance on open orders has certainly evolved through the years. Many, many years ago, the Winnebago brand of motorhomes used a predominantly open order position. But as we’ve added quality businesses and as we’ve improved our production planning processes, as most of you on the call know, we shifted to largely a non-open order production planning cycle. Now that’s been challenged in a number of different ways as the cycles have happened and supply chain challenges have happened. At this current time, our intention is still to minimize the number of open production units that we build to a reasonable number. So each of our business probably still builds a small percentage of their production that is open but we are working hard with our sales teams to stay far enough ahead of our business to have orders when we begin that unit on the production line.

As you saw from our backlog working its way down, our sales teams have to work hard and effectively to make sure that we have orders that we can match to the production process. So we’re going to be as disciplined as we can, both in terms of quantity of production but also trying to manage open order production to a reasonable amount. We are not building lots full of open units waiting for spring to happen and dealers to take those units, that’s not generally been our approach. And that’s why we have some extended downtimes here over the holidays in some of our plants.

Operator: Our next question is going to come from the line of Joe Altobello with Raymond James.

Joe Altobello: First question on travel trailers and the mix shift away from fifth wheels. How does that, coupled with the improvement in your expectation for base pricing on Towables overall, impact segment margins? Do you guys still expect to see margin expansion in Towables this year?

Bryan Hughes: I think as I mentioned, the Towables business will continue to show, in the near term here, Q1, Q2, will continue to show growth that outpaces the fifth wheel. I think that’s just where the consumer is at right now and their preference for a lower priced unit. I think that as we continue to see some of the positive developments, and some of them have been mentioned already on the call, interest rates perhaps showing a more dovish approach, consumer confidence improving, fuel costs that seem to be on a downward trend, certainly moderating inflation, both broadly speaking and the impact that has on consumer wallets as well as specific to our products. I think as we continue to see those things, some of that will normalize in the go-forward periods.

In other words, we’ll see a more consistent growth pattern between towables and fifth wheels. So that’s the current expectation. I think your question really gets to the does gross margin defer materially across our price points. I guess the message I would send there is no, it really doesn’t. There’s a little bit as there is in all product categories and other industries, ours is probably not an exception there. But we really build units from a bill of materials perspective and price them to deliver a pretty consistent margin from the lower price at the higher price. I’d say we’re always striving for innovation and differentiation. And in products where we think that we have a better position than our competition, we might realize some higher margins than the average, some more differentiation or innovation driven versus price point driven.

But that’s how we approach things and that’s what you should assume in the modeling.

Joe Altobello: And maybe on Motorhomes, you called out some operational issues in the press release. Is this the same issue or issues that you saw last quarter or are they new issues?

Bryan Hughes: I’ll start, Mike, and then you can add. A lot of similar things. We did have, in Q1 though, we had some rework that was associated with some recall activity that was necessary. We did see some lower productivity on some of the newer products that we have going down the line right now. So that was occurring. There was some flexed workforce or some additional workforce in certain verticals that might have had a bit of an impact as well. And I’m speaking really to the Motorhome margins specifically here, okay? And then just generally some higher warranty costs associated with some specific recall activity. So those are probably the call-outs. Altogether, an EBITDA margin impact of 1 to 1.5 points in that range. So certainly not as big as a deleveraging impact in the allowances and discounts that we’ve called out as the primary drivers, but it was still, I thought, worth calling out as an EBITDA margin impact in the quarter.

Operator: And our next question comes from the line of Scott Stember with ROTH MKM.

Scott Stember: Mike, can you maybe just talk bigger picture? I know it’s hard to tell right now what’s going to happen, but obviously, a lot has changed in the dynamics for the dealers, the cost of carrying product. Are you hearing through any discussions that maybe the order patterns will change materially going forward, meaning more of a just in time batch kind of scenario versus the prior big chunks of orders that you would see? And if so, do you have to adjust your cost structure at all to handle that?

Michael Happe: So a couple of elements there. I mean, dealer ordering patterns have certainly changed in recent months. And I think your observation that dealers have a higher sense of confidence that they can get new product more quickly that they don’t have on their lots at the present time or if they have a retail customer who orders something that’s not on their lots that they can secure that, I think that’s generally correct in terms of dealer anticipation that the lead time for new product from OEMs is going to be shorter. I think we all have to be careful in the industry about how aggressive we get to that end because on certain products, particularly Motorized but even a few of the Towables and certainly some of the boats as well, there are elements of the supply chain which are still just have longer lead times as well.

So I think there’ll be some natural friction that will put that pendulum in a good place going forward. Obviously, our comments today around Q2 should certainly be viewed as a confirmation that the order base that we see for that particular period of shipment months we believe will be more moderate and more constrained in the very short term. I think dealer ordering pattern change in the future will really depend on any spike of positivity at retail and the dealers potentially gaining confidence at the same time and beginning to compete again for that OEM production capacity. Certainly, the second part of your question around looking at the cost structure, we’ve been doing that all along. And as we’ve talked about the variable cost nature that is part of the dial that we use.

Unfortunately, that has obviously resulted in less manufacturing employees being needed within our businesses. We had a peak of 7,700 employees at one point, and we’re running roughly at about 6,100 employees at the end of the first quarter. But we are also looking at cost structure from an infrastructure standpoint and a more systemic standpoint as well, should we have a sort of permanently low growth environment develop here over the next several years. So we have to be prepared for any of those scenarios. And we’ll certainly update our investors appropriately with any news if we decide to change the cost structure of the business in a very material and meaningful way above and beyond the variable playbook that we’ve used through the years.

Scott Stember: And then last question just on cash flow. I know you guys don’t guide, but how should we look at ’24 from a free cash flow perspective, higher or lower than the last couple of years? And again, the deployment of capital, how should we look at that as far as profits?

Bryan Hughes: Yes, I’ll take a first stab at that, Scott, and Mike can add on. Historically speaking, Q1, Q2, they’ve not been cash generating quarters for us, and the same is likely to be the case this year, particularly with the dealer ordering patterns that we’re just talking about for Q2. One of the things that we have continuously been challenged by is the management of working capital in this difficult environment. You have production plants, long lead times, as Mike mentioned earlier, that certainly impacts that in a negative way when you just don’t see the top line getting the traction and you have to curtail your production as a result. So that’s what we’re fighting right now. And we expect that as Q3, Q4, as we start to get into the season as those volumes start to tick up that we’ll be in a position of managing working capital a little bit more aggressively.

So it’s working capital that we’re really focusing on, Scott. I think your question might be getting a little bit into capital deployment more broadly speaking. And we had some pretty aggressive share repurchase here in Q1, which we thought was the right thing to do, all things considered, and we’ll continue to use that as a mechanism of returning cash to shareholders as well. So those are the comments that I would add.

Operator: And our next question is going to come from the line of Fred Wightman with Wolfe Research.

Fred Wightman: Just one quick one. If we think about the back half improvement that you guys are talking about for calendar ’24, are you assuming rate cuts? And then how quickly do you think, if we do see cuts that could impact retail and potentially wholesale?

Michael Happe: We put our management plan together for our fiscal year back in the July, August time period. And we felt at that time that the back half of fiscal year 2024 had an improved chance of an upward swing, especially on shipments than the first half. And as we’ve indicated, I don’t think that stance has changed. Although I would say a couple of things probably are working to maybe balance themselves out. One is, dealers appear to be probably even more disciplined than we anticipated on bringing inventory in, in advance of the spring retail selling season. And particularly, and we haven’t talked about it much yet in the Q&A, but the pontoon dealers are being very disciplined as well. Even though we have probably the most preferred brand of choice right now in that category, the dealers are still taking care of their businesses by managing inventory.

So that has been a little bit bigger of a headwind versus our management plan expectations. To your point, though, we did not factor in any rate cut specifically into our fiscal ’24 planning. And so the comments, obviously, that the Fed delivered a week or so ago about probably an increased chance of rate cuts in calendar ’24 certainly is a positive sign. I think the relation of a rate cut to retail will depend on the degree of the cut and the frequency of cuts quantity wise and just the general economic view by consumers going forward. Certainly, the equity market bouncing back helps with certain consumers in terms of spending power in the future. But as of this point, I think we’re still generally holding to what we believe our management plan is in the third and fourth quarter, but watching carefully, given that Q2 is going to be more pressured than we had hoped.

Operator: Our next question is going to come from the line of James Hardiman with Citi.

James Hardiman: So I just wanted to clarify a previous line of questioning. Bryan, last quarter when we talked about sort of the ASP changes, I think we were saying that all in, Towables are going to be down mid to high single digits. Motorized, we’re going to be up modestly in terms of ASPs. Where do those numbers stand today if I’m factoring in both the apples-to-apples changes and then the mix shift?

Bryan Hughes: The like-for-like one product price today versus what it was a year ago on the Towables business, I’m seeing like-for-like of down low to mid single digits right now. All in, we had — it was, I think, a 13% decline in ASP for Towables so the large portion of that reduction in ASP driven by mix. I think that, that’s probably the right go-forward assumption sitting here today, knowing what we know. As I mentioned, we’re seeing some stability quarter-to-quarter in our bill of material or our cost. And so we’ll see what the consumer shift might be as it relates to impacting that mix. I’m not intending to provide any commentary sitting here today that we expect a mix shift. I’ll let Mike comment on his expectations for mix.

But that’s kind of what I’m saying on the Towables side. For Motorhome and Marine, I think we’ll continue to see some increases related to specifically motorized chassis cost increases that we continue to need to price for and likewise, some inflationary pressure still on motors within marine. So I guess those are the clarifying comments I’d make. Mike, anything to add on?

Michael Happe: James, I would say our business has not yet seen the full impact at retail or certainly at shipments of the new products that our Towable businesses are introducing. And so the Winnebago brand with the Access stick-and-tin trailer with the M-Series travel trailer, Grand Design with the Reflection 100, the Influence Fifth Wheel with the Serenova trailer, all of those are really in the very early stages of being produced and shipped to the market. And so from a mix standpoint, we will be putting into the market products we’ve never had before in our line at ASPs and price points and ultimately, retail that are more competitive than some of our historical products. And so I think we’ll have to watch that trend over future quarters. And that’s why we’re reasonably optimistic about our ability to continue to hold and fight for market share in the future, our new product launches like that on the Towable side.

James Hardiman: But just to clarify the clarification here, I apologize. Bryan, when you say the all-in Towables down 13% ASP, is that the right go-forward assumption? Are we saying that for the full year, we should expect something down double digits in terms of ASPs or should I think about that as, call it, a $42,000 ASP is a decent assumption for the rest of the year? Just making sure we’re on the same page.

Bryan Hughes: I think a double digit decline in ASP is a reasonable assumption going forward for the Towables business at this stage, considering the mix shifts as well as the like-for-like pricing.

James Hardiman: And then Mike, you’ve mentioned that when you look at the Street models, we were not modeling SG&A correctly. That’s certainly helpful. And then obviously, with a lot of your commentary where you’re directing us for Q2 is substantially beneath where the Street was. I guess as we look to the second half, and I don’t expect guidance here per se, but the Street is, after what sounds like it’s going to be about $2 of earnings or less in the first half, the Street is modeling $4 roughly of earnings in the second half. Is there anything that jumps out of you in terms of where the Street is positioned? Do you think that’s too high, too low, just right? Any help with how the Street is currently positioned for the second half?

Michael Happe: James, we appreciate the question. At this time, we’re not going to offer commentary on the full year at this point. We may choose to change our position in the future on annual guidance commentary. But at this time, we’re going to focus our comments to you all on Q2. There’s a bit more certainty, certainly considering timing around that period. And so I just won’t offer any additional comments at this time about the back half of the year and subsequently what that full year would then mean.

James Hardiman: Let me ask a question this way then. You made the comment about — and some of this sort of overlaying the calendar year and the fiscal year, right? But ultimately, when things stabilize and ultimately improve, you’re talking about retail and wholesale getting better mid to late calendar ’24, which is really fiscal ’25 for you guys effectively. But then there was a comment in the prepared remarks where you said that you thought the second half of your fiscal year would realize at least a pro rata portion of this expected increase, right? The industry — the shipment assumptions from RVIA do assume a meaningful increase in shipments. Can you just clarify all of that? It sounds like you’re still saying you think wholesale is going to be up materially during the second half of the year, but I just want to make sure.

Michael Happe: At this time, we have stated for calendar year ’24 a retail to wholesale equity number of 350,000 units. As I mentioned in a question that was asked earlier, I think it’s about the timing of when dealers begin to move more aggressively towards that 1:1 ratio. I think dealers are waiting on both the RV and marine side for some of these early spring retail shows to happen across the country. We have Tampa coming up in a few weeks, which is obviously one of the bellwether RV shows. We have some large marine shows, including the Minneapolis Boat Show coming up here in about a month, month and a half. I think some of the dealers are waiting to see some green shoots of retail stability as we’re going into the year. But if you do the math on historical turns and even if the dealers want to run their business at slightly elevated turns, they would need to begin to managing their inventory to a little bit higher level going into the [mid] of the retail season in that March through July period.

So we do anticipate that some of our fiscal year ’24 will see the benefit of this movement back towards a 1:1. And as Bryan said, in calendar ’24, I think a 17% increase projected in wholesale shipments. Timing will be the wildcard as to how much of our fiscal year gets the benefit of that. But we do anticipate seeing a lift in shipments in quarter three and quarter four that is material. Obviously, if that doesn’t develop, we’ll manage our business accordingly to continue to be disciplined and patient to that end. But that is what we’re planning for is a rebound here this next late spring and summer.

Operator: Our next question is going to come from the line of Noah Zatzkin with KeyBanc Capital Markets.

Noah Zatzkin: Most of my questions have been asked and answered. But given the move in steel prices in recent months, just wondering if there’s any way to think about the margin implications, maybe the size of the impact as you see it in the second quarter or the back half?

Bryan Hughes: We’ve seen easing in a lot of our key commodities, steel being one of them, certainly, and aluminum, lumber as well. Typically, what we’re going to do in this environment, Noah, as we experience some easing of some cost inputs that might have ties back to commodities, we’re going to manage our margin very carefully. Obviously, as we’ve talked about earlier in the call, we’re doing all that we can to pass along any kind of price reductions that we can realize to the end customer as well as to the dealer network so that they’re able to price more aggressively to the end customer. I think that’s the best way of thinking about some of those commodities easing. We talked about like-for-like ASP reductions, for example, in the Towables space.

That would be one example of how we intend to handle any kind of commodities easing and our cost inputs easing as a result. But I think that’s — my guidance to you would be that we’re going to manage margins to the extent we can, but try to pass along to end customers any cost favorability.

Noah Zatzkin: Maybe not to put too fine of a point on the second quarter, but I think you kind of mentioned to expect quarter-over-quarter decline in profit. Is it a quarter-over-quarter decline in EBITDA the right way to think about it?

Bryan Hughes: Certainly, we’ve been clear that we expect a top line that’s a little softer in Q2 relative to Q1, so sequential decline. I also mentioned that there’s going to be the usual deleverage associated with that and pretty consistent allowances or discounts from Q1 to Q2. So net-net, through those comments, I guess, I’d be guiding you towards a slightly lower EBITDA margin in Q2 versus Q1.

Operator: And our next question is going to come from the line of Brandon Rollé with D.A. Davidson.

Brandon Rollé: Just first, on the inventory destocking you’re seeing in the environment right now. Could you comment on what you’re seeing in the Towables space versus Motorhomes and kind of the time line for those two segments?

Michael Happe: They’re definitely moving a little bit differently. I think the motorhome category still has potentially a little bit of destocking left to do in some places, and some of that certainly will depend as we’ve talked on retail. But if I were to pick a couple of places where we could see further inventory destocking on the Motorized side, it would probably be Class A, some parts of that, particularly potentially Class A diesel, and then some parts of the Class B category as well. As all of you know, the Class B category has been very frenetic from a competitive intensity standpoint. A lot of new brands and players getting into the game, a lot of motorized chassis have become available as the overall demand for van chassis around the world has been reduced.

So I think there could be a little bit more destocking on the motorized side in certain subsegments. The Towables side, our hope is that the destocking is largely finished. And if you look at October RVIA shipments and the SSI results, we actually feel as if some towable inventory was added back into the channel during that month. But we’ll see how quarter two fiscally for us plays out. I think dealers are going to try to kind of hold in place through the end of the calendar year here, these last couple of weeks. And then we’ll see how January and February play out. But we don’t anticipate, as our comments said, meaningfully material destocking continuing on Towables here as we begin calendar 2024, but we’ll watch that carefully.

Brandon Rollé: And just one last quick question. You had talked about addressing affordability through different tactics. Could you touch on if you’re able to, your conversations with your suppliers and maybe any additional price concessions that you might feel, are coming down the pipeline as you negotiate pricing?

Michael Happe: Our purchasing teams on a daily basis within the businesses and our strategic sourcing team here at the enterprise level that really works to leverage our scale and realize synergy across the portfolio. We’ve been very honest with our suppliers about the fairness needed in dealing with any deflation that’s happening in the marketplace and that we need to realize some of that. We do have some contracts that are commodity based and are sort of index based in terms of where those lower costs and how they just go and where they’re distributed. And then in some other relationships that’s more of a negotiation based on the transparency of the supplier. I will say we remain consistent that one source of bill of material pressure will continue to be motorized chassis, that category is not seeing the deflation that some of the other categories are across our RV and marine businesses.

And we are working carefully with all the major automotive chassis suppliers on how they can manage their cost to make sure that we can work with our dealers and then consumers on affordability there as well. We’re a premium manufacturer. Our strategy is not to strip or de-content our motorhome products to the bare minimum in order to keep the business flowing. So we need some help from our suppliers on the motorized chassis side to continue to navigate some of the pressures that they are seeing.

Operator: And our next question is going to come from the line of John Healy with Northcoast Research.

John Healy: Just one kind of off the trail kind of question here. Mike, I think you mentioned in the prepared remarks that in 2Q, that you guys would give kind of an update to the longer term view of the business or financial profile of it. Given that you guys laid that out maybe 18, 24 months ago, just kind of curious what’s prompting the update on that? And if there’s anything you might kind of steer us to, to thinking about that you guys might be evaluating as it relates to those items?

Michael Happe: In November of 2022, we communicated financial and operational targets relative to the end of our fiscal year 2025. So it was a three year long range set of targets. And given that the marketplace has changed dramatically since we were together, were investors in November of 2022, we felt it was time to formally update those and we’ll work to do so during our March 2024 earnings call. And I think what you’ll see during that call, we’ll probably have a little bit longer time range. We probably won’t talk about fiscal ’25 in terms of long range targets. We’ll probably be a little further out from that. And you’ll see an updated and refreshed set of financial and operational targets based on our best assumptions.

Candidly, we’re just trying to be helpful to our investors and to especially, you, the analysts with some longer range guidance for purposes of modeling and where we think especially the organic business can head in the future. So stay tuned. We’ll give you an update in March.

Operator: Our next question is going to come from the line of David Whiston with Morningstar.

David Whiston: I wanted to go back to the SG&A buckets you laid out, Mike, in terms of just the incremental spending. Basically, some of that is very customer focused and product focused and some of that is more your internal systems. And I’m just curious if you could talk a little bit more about how much — at a very high level, how much is more of it going to the product side or just the internal side? And you mentioned ERP. I mean, you guys have been doing ERP upgrades, I think, for years. Is this a new upgrade or the ongoing one that was a multiyear one in the first place?

Michael Happe: I’ll talk about ERP here real quickly. We continue to finish the long project we’ve had around our Winnebago branded businesses and some of our enterprise functions relative to an ERP system there. And there is a light at the end of the tunnel here over probably the next — probably the next 18 to 24 months in terms of that project. But we have now other ERP systems that we’ve obviously inherited through acquisitions of the other brands and we have to do some moderate upgrades to those from time to time. And there’s one particularly here in the short term, and I won’t get into the specifics that we are working on. I would say probably the balance of the SG&A investments we’re making are about around those three areas engineering, digital asset investment and IT systems is probably relatively evenly balanced.

The SG&A impact on an annual basis is definitely eight figures incremental to what we have historically planned. But we think it’s the right thing to do to be competitive and prepare the business for the future. And so we’re obviously being as disciplined as we can and we’re spreading those out across, obviously, each of the quarters. But it’s eight figures of incremental spending on an annualized basis that we’re adding here. Now if the business faces tougher market conditions, we will turn the dial as we can on those as well. So just so everybody knows, we are going to be very prudent and reasonable as we make investments in those areas.

David Whiston: And just going back to capital allocation discussed earlier. Can you say if buybacks or M&A would be a priority between those two in fiscal ’24?

Bryan Hughes: I guess broadly speaking, the M&A environment, I guess, continues to cure off the dislocation that we’ve seen over the past couple of years. As you can appreciate, at the peak, companies in our space wanted to sell off that peak with very high prices, and then you hit a trough and then companies want to sell on a forward view. It’s just really hard to find that price that both buyers and sellers can agree to. I think as we start to see some normalization on retail and get a clearer view of the year ahead and what the right multiple would be to pay, we’ll see some better M&A environments, I’d say, to allow us to weigh certain targets and hopefully make some additional investments in that area. So share repurchase is clearly a function of our success on the M&A front.

Without some bigger targets that we can execute on, we’ve had some elevated share repurchases over the past two, three years. Our goal is to continue to prioritize growth. We have stated that historically, that’s still the case. We’re going to prioritize growth in the form of both organic investments, Mike just talked about some of those, as well as inorganic investments. So that will be our priority. We’ll continue to use share repurchase as a great mechanism of returning the cash to shareholders in the absence of M&A.

Operator: And I would now like to turn the conference back over to Ray Posadas for closing remarks.

Ray Posadas: That is the end of our first quarter earnings call. Thank you, everyone, for joining us. We hope you all have a safe and happy holiday season. Enjoy the rest of your day. Thank you.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.