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

Winnebago Industries, Inc. (NYSE:WGO) Q1 2023 Earnings Call Transcript December 16, 2022

Operator: Good day, and thank you for standing by. Welcome to the First Quarter Fiscal 2023 Winnebago Industries Financial Results Conference Call. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to turn the call over to, 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 2023 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 website at investor.wgo.net and the replay of the call will be available on our website later today. The news release with our first quarter results was issued and posted to our website 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 in 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, everyone. As always, we appreciate your interest in Winnebago Industries and spending time with us to review our fiscal 2023 first quarter financial results. I will initiate the call with a broad overview of our performance during the quarter and then pass the conversion to Bryan Hughes to cover our financial results in more detail. We will then offer some closing thoughts before turning to your questions. Winnebago Industries first quarter results are a testament to the strength, diversification and resiliency of our brand portfolio amid more difficult industry and macroeconomic conditions. As we expected, demand for our premium RV product lineups continue to normalize in the first quarter, lapping a period of tremendous growth for the RV lifestyle in our fiscal 2021 and 2022 years.

While we believe many of the underlying drivers of this record setting period are secular and likely to have a significant and positive impact in the long-term, including the introduction of thousands of new, younger and more diverse RV families that could remain customers of our premium brands for many years to come. Winnebago Industries will continue facing difficult comparisons to our fiscal 2022 results as the RV industry stabilizes throughout fiscal 2023. Our performance was also challenged by several macroeconomic factors that we expect to impact our near-term results. This includes a broader economic slowdown, general inflation that while trending lower is still meaningful, higher interest rates and as a result, lower consumer confidence.

That said, our outstanding Winnebago Industries’ team nimbly managed these challenges in the first quarter. I am immensely proud of our teammates for their arduous work to enhance the agility of our supply chain, increase the efficiency of our operations, and drive an increasingly more balanced portfolio of profit streams that are at various places in the outdoor economic cycle. The result was reasonable revenue stability and solid bottom line results that exceeded most external expectations. While we certainly cannot control the overall size of the outdoor recreation market in the immediate near-term, we can stay focused on strengthening and investing in our golden threads of quality, innovation and experience that will drive our profitable growth for years to come.

Ultimately, Winnebago Industries achieved $952 million in net revenues in the quarter, a decline of 18% from the year-ago period. We realized a consolidated gross margin of 16.8%. While consolidated gross margin was down year-over-year, it remains well above pre-pandemic levels, up 240 basis points when compared to fiscal 2019 first quarter, and we delivered adjusted earnings per diluted share of $2.07. While down compared to historic record high levels last year, these results remain strong and reflect the resilience of our operating model, the vibrancy of our products and a more robust organization that we are today. Our results were driven by a few key factors. First, the strength of our premium outdoor lifestyle brands and our innovative product portfolio.

Some of you saw our products in action at our Investor Day last month. The best current example of this formula is the Barletta lineup of pontoons. They are simply some of the best premium pontoons on the market today in function and feel, and the marine customers are voting with their purchase decisions. Barletta, which was founded just five years ago and acquired in August of 2021 by Winnebago Industries, has seen its market share begin to approach almost 7% of the market. The growth and profitability of our Marine segment is now a material chapter to our story and becoming a more well-rounded outdoor recreation mobility leader. We remained incredibly focused on the organic competitiveness, health and growth of our business. Our three RV brands, Winnebago, Grand Design, and Newmar, all received the recent Dealer Satisfaction Index awards from the RV Dealer Association, which places a special emphasis on quality.

We recently began full production in shipment of our new HIKE 100 FLX travel trailer, which was named the model year 2023 “RV of the Year” by RVBusiness magazine. This product is part of an initiative to expand into differentiated customer segments and drive innovation with off-grid and off-road capabilities. A second key driver of our results in the first quarter was our flexible operating model that compliments a highly variable cost structure and our commitment to operational excellence, which enabled Winnebago Industries to maintain strong profitability despite market pressure on our topline. Our operational excellence initiatives are another example of the shared enterprise capabilities that our individual business units leverage across our enterprise.

These initiatives include an outstanding strategic sourcing function, manufacturing best practices, company-wide focus on consumer insights and the consumer experience, and the benefits of an overlapping dealer network with deep, long-term relationships. And finally, certain external factors had meaningful impacts on our first quarter performance as well. The most significant was our supplier Mercedes-Benz AGs recent recall of all model year 2019 to 2022 Sprinter Chassis. As we discussed during our Investor Day last month, this recall prevents Winnebago Industries and all industry OEMs, upfitters, and retail dealers using that chassis from currently shipping, selling, or delivering any of the affected products until a remedy is implemented sometime in the first calendar quarter of 2023.

This issue negatively impacted our first quarter top and bottom line results, including inventory levels and cash flow. Notably, despite this impact, we grew our Motorhome segment revenue in the first quarter and delivered solid profitability, reflecting the continued fundamental strength of our operations and margin profile. The second external factor we are actively managing is the dealer demand for our wholesale towables RV inventory. As I have mentioned previously, each of our reporting segments is experiencing varying forms of channel stocking behavior, which in turn impacts dealer inventory levels, backlog and production schedules in diverse ways across our portfolio. We are especially and closely managing Towable RV production levels to align with normalized dealer inventories in this segment.

While our Motorhome and Marine businesses work carefully to replenish dealer inventories that remain low in various sub-segments. We are focused on exercising further rigor and a focus on sustainable long-term value by adjusting production across our businesses to calibrate to the needs of our dealers and in consumer demand levels. Our operating model allows us to do that profitably despite some disruption in our supply chain as we adjust our manufacturing to real time market dynamics. We are proud of how our results in the first quarter demonstrate that Winnebago Industries can and will deliver strong profitability and performance through challenging cycles. Furthermore, the benefits of our diversified and more balanced portfolio were evidenced by the growth in our Motorhome and Marine segments helping to offset the decline in towables.

Our Marine segment revenues grew 66% year-over-year in the first quarter and accounted for 14% of our revenue, highlighting the tremendous success of our initiatives in that segment, and benefiting from continued strong momentum specifically in the Barletta brand. At the same time, as I mentioned, our Motorhome segment continues its growth trajectory with revenues growing 10% year-over-year as consumers continue to see the value of our products in the market. Our broad portfolio, enterprise synergy and capabilities and commitment to quality, innovation and experience enhance our resiliency and ensure we are well positioned to create long-term value. With that summary, I will now turn the call over to our Chief Financial Officer, Bryan Hughes, to review our fiscal 2023 first quarter financial results in more detail.

Bryan?

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Bryan Hughes: Thanks, Mike, and good morning, everyone. First quarter revenues were $952.2 million, reflecting a decrease of approximately 18% compared to $1.2 billion for the fiscal 2022 period. Our topline performance was driven by a number of factors, which Mike mentioned, including the expected cooling of demand, driving lower unit sales, particularly in the Towable segment. We were also impacted by the Mercedes-Benz AG chassis recall, which prevented us from shipping, selling, or delivering any products included in the recall, and resulted in an estimated negative impact of approximately $50 million in first quarter net sales, as well as related impacts to profitability and working capital, and is expected to have a similar impact in Q2.

Gross profit for the quarter decreased 30.1% to $160.4 million compared to $229.4 million during the first quarter of 2022. Gross profit margin of 16.8% was 300 basis points lower than last year, driven by operating leverage, chassis recall-related production inefficiencies, a normalization back to seasonal trends within our Towable segment after extraordinary performance during the prior year period when dealer inventories were at all-time lows, and comparing against the strong Q1 last year where pricing was taken ahead of inflation. Operating income was $85.9 million for the quarter, a decrease of 41.3% compared to $146.4 million for the first quarter of last year. Fiscal 2023 first quarter net income was $60.2 million, 39.6% lower than the $99.6 million recorded in the prior year quarter.

Reported earnings per diluted share was $1.73 compared to reported earnings per diluted share of $2.90 in the same period last year. Adjusted earnings for diluted share decreased 41% year-over-year from $3.51 to $2.07. Consolidated adjusted EBITDA decreased 42.0% to $97 million from $167.2 million in the first quarter of 2022. I would like to call out that we adopted a new accounting standard in the first quarter of 2023, which impacted the accounting treatment for our convertible notes. As a result of this required accounting adoption, we no longer recognize a non-cash discount or related non-cash interest expense from the convertible notes. The new standard also requires the earnings per diluted share calculation to assume conversion of the entire amount of shares underlying the convertible notes and interest charges to be added back to the calculation.

Prior year results were not adjusted or otherwise affected by the new accounting standard. Our adjustment following adoption of this new accounting pronouncement results in adjusted EPS to be on an equivalent basis with how we have been doing the adjustment previously by removing the dilutive impact of the convertible notes. In this way, we recognized the economic benefit of the call/spread overlay that we implemented when we issued the convertible notes. Accordingly, we will adjust the diluted shares outstanding in the calculation of adjusted diluted EPS until our share price exceeds the strike price of the warrants, which is at $96.20. Now I’ll turn to our segment performance, starting with our Towable segment. Revenues for the Towable segment were $347.3 million for the first quarter, down 46.7% compared to the prior year.

This was primarily driven by declines in unit volumes as a result of the ongoing softening of consumer demand as well as the impact of our adjusted production schedules due to normalized dealer inventories. Segment adjusted EBITDA was $36.3 million, down 67.6% from the prior year period. Adjusted EBITDA margin was 10.5%, down 670 basis points year-over-year, but only 30 basis points sequentially and similar to historical levels. As we discussed in our Q4 call, we reinstated our traditional fall programming and are comparing against pricing ahead of inflation last year in Q1. Backlog decreased to $434 million, down 76.9% from the prior year when dealers were focused on increasing their inventories. Turning to our Motorhome segment. We delivered solid first quarter revenue growth of 10.1% to $464.2 million compared to the prior year.

Our year-over-year growth was the result of the pricing actions we took in fiscal 2022, which more than offset the negative impact from the chassis recall. Segment adjusted EBITDA was $50.3 million, representing an increase of 0.2% from the prior year. Adjusted EBITDA margin was 10.8%, down 110 basis points, primarily due to production inefficiencies tied to the chassis recall. Finally, let’s turn to our Marine segment. In the first quarter, revenues for the Marine segment were $131.4 million, up 65.7% from the prior year as a result of strong unit growth across both Barletta and Chris-Craft. Adjusted EBITDA for the Marine segment was $18.5 million, 74.5% higher than the same period last year, and adjusted EBITDA margin was 14.1%, 80 basis points higher than last year.

Dealer inventories continued to build towards more normalized levels in the marine space, and our backlogs were up 23.8% compared to the first quarter of the prior year, reflecting the strong demand for our brands. Moving now to the balance sheet. As of the end of the quarter, we had roughly $590.4 million in outstanding debt, representing a net debt-to-EBITDA ratio of approximately 0.6x. Our healthy balance sheet has continued to allow us to execute our balanced capital allocation strategy, which prioritizes strategic investments in our business to drive growth while returning capital to shareholders. For example, we reached a number of exciting milestones this quarter that will enable future growth across our portfolio. In November, we announced plans to develop a new advanced technology innovation center.

We also continued to expand our manufacturing capacity for both of our marine businesses to help meet the pent-up demand for those products. As always, we balance these investments with returning capital to our shareholders and continued to pay our quarterly dividend for the quarter, which as a reminder was increased 50% to $0.27 per share during the fourth quarter of fiscal 2022. With that, I will now turn the call back to Mike to provide some closing comments. Mike, back to you.

Michael Happe: Thanks very much Bryan. At our Investor Day last month, we unveiled fiscal 2025 strategic targets on net revenue, RV and pontoon market share, gross margin, adjusted EBITDA yield, free cash flow, and our community giving levels. We believe those targets are appropriate and achievable even as the distractions of the near-term market conditions are present. While there will likely be RV industry shipment contraction in calendar year 2023, we do believe market tailwinds will be present again in that segment by the time we reach the fiscal 2025 year. However, a dramatic rebound in RV shipments is not a dominant assumption in order for us to achieve our 2025 financial targets. We also have stated a clear intent to complement profitable organic growth with strategic inorganic investments and continued operational excellence initiatives that cumulatively drive accretive profitability in competitive differentiation during this three-year period.

As it pertains to calendar 2023, RV shipment projections, we now generally agree with the recent RV Industry Association forecast, which anticipated a mid-range estimate of 391,000 wholesale sales. This updated expectation is slightly lower than our previous 400,000 to 410,000 forecast we offered in October. In the meantime, we are continuing to execute our strategic priorities and invest in the areas of our business that will create new growth engines. As Bryan stated, we are expanding our capacity in both of our marine businesses to accelerate our market share potential. We announced last month that we have signed a lease for our ATG Innovation Center, which will be dedicated to applying emerging technologies for next-generation products in all our businesses.

This includes the strategic imperative to execute a measured, but intentional electrification roadmap within our brands that balances scaled adoption opportunities, superior customer experience, and competitive differentiation. Looking ahead, we are confident that Winnebago Industries has significant long-term opportunity for sustained market share gains and profitable growth across our portfolio, leading to enhanced value for our end customers, dealers, employees and shareholders. Before we open-up the line to questions, I want to touch on the continuing progress we are making on our commitment to corporate responsibility. In fact, this traction was recently validated when we were named one of America’s most responsible companies by Newsweek Magazine, a first time honor for Winnebago Industries.

On the environmental side, we are working actively on waste, water, energy and product lifecycle targets that we have set for the years 2030 and 2050. On the community side, we are passionately engaged in making the communities our employees live, work and play-in better as well as the health of and the access to the outdoors overall. We are doubling down on our fiscal 2025 giving targets compared to our fiscal 2022 actual philanthropy, and we are off to a great start with our recent community go campaign this fall, collecting $1.2 million, supporting 270 different non-profit organizations. The heart of our company shines through these types of initiatives. Lastly, we just released earlier this week the fourth edition of our corporate responsibility report.

Our most substantive report to date, this publication outlines our aspirations on our ESG priorities and shows specific base levels, frameworks, and progress to achieve those ambitions. I am humbled and inspired by the enthusiasm and commitment of our team to both do well and especially do good. That concludes our prepared remarks this morning. We hope all of you have a safe and joyous holiday season. I will now turn the call back over to the operator who will open the line up for your questions.

Q&A Session

Operator: Thank you. And our first question comes from the line of Craig Kennison with Robert W. Baird. Please proceed.

Craig Kennison: Hey, good morning. Thanks for taking my questions. Question on retail for this year and next year for the industry. I’m wondering where you think 2022 will finish for the industry and what is required in 2023 at retail in order to hit the RVIA range that you think is attainable?

Michael Happe: Good morning, Craig. This is Mike. So let’s start with 2023 and then I’ll move back to 2022, which obviously has very little time left in it in terms of a calendar year. From a 2023 standpoint, we believe that retail will probably be very similar to the RVIA wholesale shipment forecast for that particular year. Our hope is that it is slightly above. So if I were to put a range as of today, it would be in that 390,000 to 400,000 retail range for calendar year 2023 with the goal being that the industry can particularly on the towable side take out a little bit more inventory over the course of next year. So that is our thinking and as you might imagine those thoughts are subject to updates, obviously as we see the market conditions play out in front of us.

I would say for calendar year 2022 retail, again, the period that we’re going to be completing here in a few weeks, we’re probably in that 440,000 to 450,000 unit range with the retail that is left. Obviously SSI has not reported yet on November. We have a decent idea of November for our business and then we’re a couple weeks into December. So we’re probably in that 440,000 to 450,000 range for calendar year RV €“ 2022 RV retail.

Craig Kennison: Great. Thanks, Mike. And then a question on ASP for both categories, it looks like your average selling prices are trending up around 20% or a little bit more. How much of that is mix versus pricing action that you’ve taken? And then if you could just address the affordability impact for your consumer and whether that weighs on your retail outlook?

Michael Happe: Craig, I’ll address the latter part of that question and then ask Bryan Hughes to give you his thoughts on the ASP elements. We certainly are thinking a lot about the affordability of the lifestyle today. My first message would be that the RV lifestyle still compares economically favorably to other forms of travel particularly for singular trips or longer journeys. The cost of airplane tickets, hotels, rental cars certainly is not going backwards. And in fact, those are experiencing some inflation as well. So €“ and RV road trip continues to compete very favorably cost wise for the American consumer with trips of other means. But the affordability is something we’re watching both in terms of the retail prices that are in the market and now the higher interest rates from a consumer financing side that are in the market today for consumers to take out a loan to acquire those products.

And certainly as a premium branded parent company with five great brands, but all of them arguably positioned in the sort of the better, best part of the market. We are watching that carefully. So something that I’m sure we’ll talk more about as we get more into the spring 2023 period where I think we’ll have a better handle on how the consumer is reacting to the prices at that time.

Bryan Hughes: Yes. I guess, and on the ASP side of your question, Craig. If you look at our segment level information, you’ll see that as you pointed out the ASPs are up 22%, 23% for both Towable and Motorhome. That’s largely driven. As we’ve talked about in the past, the inflationary pressures that we’ve been facing. We did price ahead of inflation a bit in last year’s Q1 as we commented at that time. But there’s not a lot of mix if you look at underneath or within those segments. It’s largely net pricing and mix plays a relatively much smaller role in that ASP increase.

Craig Kennison: Very helpful. Thank you.

Operator: And our next question comes from the line of Tristan Thomas with BMO. Please proceed.

Tristan Thomas: Hey, good morning.

Michael Happe: Good morning, Tristan.

Tristan Thomas: I just wanted to kind of follow-up on Craig’s question. Your dealer inventory is up quite a bit year-over-year as well when they reported. And I don’t think November and December is going to remove too many units from the dealer channel. So do you think that €“ would you prefer wholesale outpace retail, or would you prefer maybe wholesale came in a little bit lighter?