Sheila Davis - Manager of Investor Relations & Public Relations Randy J. Potts - Chairman of the Board, Chief Executive Officer and President Sarah N. Nielsen - Chief Financial Officer, Chief Accounting Officer and Vice President.

Wenjun Xu - Thompson Research Group, LLC Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division Morris Ajzenman - Griffin Securities, Inc., Research Division Barry Vogel.

Good day, ladies and gentlemen, and welcome to the First Quarter 2014 Winnebago Earnings Conference Call. My name is Denise and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I will now like to turn the conference over to your host for today, Sheila Davis, Public Relations and Investor Relations Manager. Please proceed..

Thank you, Denise. Good morning, and welcome to Winnebago Industries conference call to review the company's results for the first quarter of fiscal 2014 ended November 30, 2013. Conducting the call today are Randy Potts, Chairman of the Board, Chief Executive Officer and President; and Sarah Nielsen, Vice President and Chief Financial Officer.

The news release with our earnings results was posted to our website earlier this morning. The call is being broadcast live on our website at winnebagoind.com and a replay of the call will be available on our website at approximately 12:00 noon Central Time today.

If you have any questions about accessing any of this information, please call our Investor Relations Department at (641) 585-6803 following the call today. This presentation may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Investors are cautioned that forward-looking statements are inherently uncertain. A number of factors could cause actual results to differ materially from these statements.

These factors are identified in our filings with the Securities and Exchange Commission over the last 12 months, copies of which are available from the SEC or from the company upon request. I'll now turn the call over to Randy Potts.

Randy?.

Thanks, Sheila. I'd like to start by saying that we had another great quarter and I am very proud of our management team and all of our employees whose hard work and creativity are contributing to opportunities for success at Winnebago. We had an excellent reception to our new products at the National RV Show in Louisville, Kentucky.

Our display was very busy throughout the show with dealers wanting to see our new and unique products. In motorized, our new trend was named the top RV debut for 2014 by RV Business.

Also, we introduced the new ERA 70C, our first Class B with a slide out on the Mercedes-Benz chassis, the Vista 36Y, a Class A gas motor home that features a unique galley with a panoramic view. And on the towable side, we introduced the new Destination, our first high-profile Lightbody luxury fifth wheel.

These new entries, along with new products we introduced earlier in the year are helping to fuel continued growth at Winnebago. This is evidenced by our backlog, which has risen for 8 consecutive quarters.

Also in the quarter, we successfully negotiated a large rental order to be delivered primarily in our third fiscal quarter, and this is incremental to our normal rental business. Due to this new business, as well as the increase in our non-rental motor homes sales, we've reduced our normal Christmas shutdown.

We've scheduled 4 additional days of production during the 2 weeks of Christmas and New Year's. Growth in the Winnebago Touring Coach lineup has also prompted us to expand to a production facility in Lake Mills, Iowa, approximately 16 miles from our main headquarters here in Forest City.

Moving our Class B production from its current Charles City location to Lake Mills will create more capacity in our Charles City plants. Going forward, we will continue to look for creative ways to do more with less, and grow our business in the best interest of our shareholders.

With that, I'll turn the call over to Sarah Nielsen for the financial review..

Thank you, Randy. The strong demand for our products has carried over from fiscal 2013 into the first quarter of fiscal 2014. Motor home unit volume was a driving factor in this improvement as we invoiced over 2,000 units in the quarter. This is the first time since fiscal 2008 that we have eclipsed the 2,000 unit shipment level in a quarter.

Product mix partially offset the volume increase as the average selling price of our motor homes decreased 10% during the quarter as the product mix shifted towards our new lower price point Class A diesel product, the Forza and Solei, and a higher percentage of Class C product, when compared to the year-ago quarter.

As noted in our press release, we do have 2 additional factors affecting comparability of our first quarter to last year. First, we revised our shipping terms to reflect FOB Forest City which is consistent with standard industry practice.

As a result, an additional $21 million of revenue was recognized in the quarter, which represents units in possession of the transportation company in transit to the dealer.

Conversely, due to our 52- and 53-week fiscal year convention, the first quarter of fiscal 2013 had an extra week in the quarter as compared to the first quarter of fiscal 2014, resulting in an additional $14 million of revenue recognized last year.

Even as we've reached a 5-year high in quarterly shipments, we also continued to grow our backlog levels as Randy noted. For the eighth consecutive quarter, our backlog increased and it now stands in excess of 3,500 motorized units. This highlights a number of positive factors for us.

Our dealer networks confidence continues to grow as evidenced by their increasing order position and their inventory levels. This also validates our belief that the new product introductions we have made are well-received at the wholesale and retail levels. The demand for product has resulted in several operational changes at Winnebago.

We continue to increase our production rates, both at our current facilities and as we initiate production at our newly leased Lake Mills facility. In addition to these actions, we've also been working with our suppliers to ensure we have adequate materials to satisfy our dealer backlog.

We expect to receive an increase in Class A gas chassis late in our second fiscal quarter. The continued acceleration of production rates has also increased the levels of required working capital. Our inventory increased to nearly 123 million as we produced more product to satisfy the strong backlog position.

Our towable subsidiary was not accretive in the first quarter. Revenues were down 13%, although operating results were much improved as compared to the prior year first quarter losses due to the substantial operational changes made since last year.

As Randy commented in the press release, the management team has been working diligently to create new innovative products and accelerate production rates in addition to actively managing our fixed cost structure. These efforts have allowed us to expand operating margins to 7.2% as compared to 5.1% last year.

Ultimately, we were able to increase our net income by over 50% as compared to a year ago. The improving RV market conditions coupled with the execution of our business strategy has delivered increasingly positive financial results.

We believe that we are well-positioned to continue to deliver these types of results and have the flexibility to react to the rapidly evolving market environment. I will now turn the call over to the operator for the question-and-answer portion of the call..

[Operator Instructions] Our first question comes from Kathleen (sic) [Kathryn] Thompson with Thompson Research Group..

This is Wenjun sitting in for Kathryn. My first question is related to the SG&A improvement. SG&A were improved by nearly 110 basis point year-over-year.

Could you give more granularity for the drivers of this improvement? And how much was related year-over-year -- related to year-over-year lower promotion offered to dealers versus other drivers?.

Certainly I can respond to that. I guess what would be probably most notable when you look at the year-over-year comparison, last year with our 14-year -- 14-week quarter, the Louisville event actually fell in our first quarter. This year, that's a second quarter event.

And that's going to be on the selling expense that we are going to record in our second fiscal quarter. So there is a -- a portion of our selling expenses that have really just shifted between quarter-to-quarter.

The other most significant item that would be a benefit and a relevant talking point would just be the added leverage we're seeing from an operating expense standpoint as our revenues grow. But the Louisville timing is important to note..

Okay.

And then, could you provide -- color on recent inventory turns you see at dealers’ level? And how does it compare to last year around this time?.

Well, we continued our shipped product to satisfy the dealers' demand. So at the end of the fiscal year in August, our retail turns on a trailing 12-month basis, were approximately 2.7. Now because we have delivered a lot of product to our dealers inside the quarter, we are seeing those turns on a trailing 12-month basis closer to 2.

In the quarter, we saw retail -- our year-over-year goal increase about 8%, but again that's comping to 14 weeks to 13 weeks if I exclude or compare it on a comparable basis, we're up approximately 16% on the retail perspective. This is not the seasonally strongest time of the year for retail.

But we do still see retail trends growing on a year-over-year basis. But for an extended period of time, we've really been working to try to supply adequate levels of inventory to our dealers and see that the turns are still completely reasonable in light of the demand and the retail experience and traffic out there..

Okay. And also -- my last question is related to acceleration of RV dealer consolidation recently, actually over the past 9 to 12 month.

Could you comment on the potential impact or benefit those consolidation activities on your future sales?.

Yes. I'm not sure that I -- it's clear to me what data you would be referring to. I mean there's always some consolidation going on. But you said accelerated dealer consolidation and I'm kind of struggling with that statement.

Do you have more specifics as to which dealers would have been consolidated?.

That's just a general observation that we hear from our industry contacts..

Okay. Well, I guess I would go on record as saying that I just don't -- I don't perceive that there has been an accelerated dealer consolidation, at least in our dealership base.

Is that fair?.

Our next question comes from Craig Kennison with Robert W. Baird..

Maybe I'd start with the backlog obviously, it's a huge backlog. I'm trying to maybe unpack the backlog if you will. I know it benefits to some extent from a larger rental order. But you also don't have the benefit of Louisville, whereas you may have had that benefit last year.

So can you give us a feel for what an adjusted backlog might look like just to -- as it reflects normalized dealer demand?.

Well, Craig, I'm sure Sarah would be happy to dive into the specifics. But I'd like to start by saying that the Louisville impact, while it's there, we don't really look at shows to drive our business the way we once did. So we don't go into Louisville saying that this is a make-or-break show or that we have a goal of achieving x many orders.

So before Sarah goes into more detail, I'd kind of like to condition it by saying that, Louisville or really any specific show, when it comes to wholesale orders, we encourage our business to be run on a day-to-day and week-to-week basis, not seasonally the shows. So just kind of wanted to qualify that..

And then maybe to give a little bit more color. Obviously, you're looking at the Class C growth in the backlog, that would be significantly attributed to the rental order we talked about. But also there is new product introductions still inside of a number of our categories in the backlog.

We began to ship on our new Class A diesel product inside of the first quarter. But based on the timing of our new B and C offerings, that's more going to be a second and third quarter dynamic, as we continue to start up the production and ship that into the marketplace. So there's still -- it's a lot of new product demand in our backlog.

And for quite a few quarters, we've talked about the strong Class A gas demand and the limitations of chassis supply. And we think we're going to start seeing really a significant change on that in the beginning of calendar 2014. But that dynamic has continued to be relevant as it relates to our backlog at this -- at the end of Q1..

Great, that helps. And then just -- I know you don't provide specific guidance regarding gross margin. But how significant should we consider this rental order to be relative to gross margin? In other words, you've been improving your gross margin due to increased volume.

Do you think that you can continue to improve gross margin on a year-over-year basis?.

Well, in light of how significantly our production and our wholesale sales upper-end total, I think that's still a fair way to look at that. When you break the quarters out inside of a year, it was as dynamic for us, even in fiscal '13 and in previous years where quarter 3 where, a lot of the rental product is shipped into the marketplace.

The ASPs and the margins are influenced by that. But offsetting that impact would be just the added utilization and leverage that provides us because of the additional production..

That's great.

And then with respect to ASPs, would you please provide ASPs by category?.

Yes. When you look at the first quarter of '14, our Class A gas average selling price is $93,212, and that's up about 3% as compared to last year. Class A diesel was $172,765, which is down almost 16% and very significantly influenced by the new product we are shipping into the marketplace at a lower price point.

As a result, our Class A gas or -- excuse me, Class A average in total is $121,742, which is down a little over 7%. Class C was $73,673, and that's down almost 7%. Also influenced by mix with new product introductions in this past year.

And our total A&C average is $101,635, which is down almost 11%, as compared to last year, our Class B ASP was $79,075, slightly up and then all motorized units averaged together was 101 -- or excuse me $100,487, which is down 10% as compared to last year.

Moving over to the towable product, our travel trailer ASP was, $19,515, which is up 7.4% as compared to last year. And our fifth wheel was $32,866 up almost 9%. So total travel trailer ASPs was $21,639..

That's great. And maybe I'd finish with a question for Randy. Just with respect to the towable business, I know you've done some restructuring there, changed the product and et cetera.

But could you give us an update on how you feel about the towable business? And I know -- to your comment on Louisville, I know the Louisville show is a little more important for your towable business.

Any comment you'd have on orders from that show?.

Now well, that's a fair assessment, Craig. The towable business -- the current state of our towable business is not where we expect it to be. We continue to work towards improving that. I think you saw that when you were at Louisville with the products that were displayed. But we do have -- we still have a lot of work in front of us.

It is good to see that it's going in the right direction, as Sarah noted. There are a lot of things that are improving. But we're still not where, where we need to be and I think that's pretty obvious. But it's a big market and there is a lot of opportunity for us there, and we still have our sights set on that..

Our next question comes from Morris Ajzenman with Griffin Securities..

Two questions, first let's start on towables, then we'll go to the motorized side. On the towable, you mentioned revenues being down 13%, what was the actual revenues in the quarter and then you said operating results improved.

Was it breakeven positive or can you give us those numbers, please?.

From the first quarter standpoint, we're a little over $10 million for towable revenue, $10.5 million as compared to -- slightly over $12 million last year. So as I highlighted, revenues were down as compared to a year ago. Last year, we had a pretty tough first quarter in regard to operating performance, and we lost almost $1.4 million.

And this year, we were not quite breakeven, we lost slightly over $400,000 operationally. So almost $1 million of improvement year-over-year but not breakeven..

Will we reach breakeven or something over the next few [ph] quarters -- it will be positive based on internal projections?.

That's exactly the plan we are working towards..

Okay. And what is it in the towables overall in this environment? We've had a rebound in consumer spending, et cetera, et cetera and the economy is not -- starting to -- surging, but it's kind of chugging along, growing a couple of percent per quarter per annum.

What is it in towables why we're not seeing a -- really there's improvement with the amount of improvement in the economy?.

Well, it recovered. The towable business recovered -- the recovery for the towable business was much earlier in the overall recovery than motorized. I mean towables have been operating close to historic norms for a few years now where motorized is still well below historic norms.

I think it's just -- it's been closer to normal for a longer period of time. We don't know how much more recovery opportunity there is in that whole market..

Okay. I guess maybe I kind of phrased it wrong. But I get from your perspective, I understand you've only been there for a couple of years, since you made the acquisition. So -- but revenues are still declining from your perspective for the company, not for the industry, let's say.

But what is it that you are missing in that pie that you're not enjoying any sort of growth there from towable business?.

It's pretty simple, it's the right product. You've got to have the right product. It's a product market and you've got to have competitive product in key segments to generate the sales for the revenue, and we just haven't hit on all cylinders yet..

Fair enough. That's right just -- if it’s okay, fine. Switching gears. So run through this again, I want to have a better -- mind [ph] results. When you were talking about the additional $21 million, I think you said in revenues recognized in this quarter.

Can you go through that again and then I have a follow-up related to that?.

Yes, we highlighted in our prepared remarks that we made a change in our shipping terms. And so that resulted in $21 million of revenue that was recognized in the quarter, just as a function of delivery terms being FOB Forest City and it represents the units in-transit to our dealer, very similar to standard industry practice.

So it's a shift in relation to when we're considering the sale to be final. And it moves that dollar value into accounts receivable in the sense from inventory..

So if that was not done, that would be recognized in the second quarter?.

Yes. And we also highlighted in regards to comparability just the fact that a year ago, we had an additional week inside of the first quarter, which resulted in theory last year of $14 million of incremental revenue on that. This year was a 13-week quarter..

I understand that. But again, this in-transit shipping -- this change, then from our perspective, in the next quarter we should take out $21 million in our revenues that we had presumed. And then looking at it on a apples-to-apples basis, if this wasn't done, your revenues for this quarter would have been $200 million.

I'm just talking out loud here because the facts [ph] under pressure today and I'm trying to understand -- outside a lot of expectations built-in here. Is this part of what -- is kind of we're trying to understand here, or I'm trying to understand, that from a revenue perspective, this quarter would have been even weaker than what we report.

I guess it went weaker and not that it's weak revenues, but it would have been close to $200 million if not for this change in shipping terms, is that correct?.

That's fair but it's a continuing dynamic at the end of every quarter. So it's a one-time change and we typically collect on the receivables in approximately 2 weeks. So that it flows through fairly quickly. But the timing of when we deliver is highly irrelevant to what you see in the balance sheet at the end of any quarter.

And I guess, if you have any further questions, I'd be happy to answer those..

No, that's fine. I'm not trying to suggest anything. But I'm just trying to make sure I understand what the numbers are and they are what they are. Let me ask a -- I think it was in the past, the motor home backlog, $340 [ph] million.

Approximately on average, how much of that flows through revenues in the next quarter?.

Well, we haven't been in a normal time frame with such an accelerated backlog or growing backlog for 2 years now. If you go to pre-recession time, we typically would ship all of our backlog inside of a quarter then some.

Now that we have been in a period of increasing production, in certain product categories, limitations on chassis supply, we've been living a life for a period of time where the backlog is beyond 1 quarter's ability to ship.

And also that can be influenced by when we start production and on how quickly we can satisfy the demand to get that product into the marketplace initially. So we do have a backlog that's larger than what we see would be shipped inside the next quarter.

And as Randy touched upon from a rental standpoint, that is another relevant timing perspective to look at. I mean, that's typically a third quarter kind of event, but some of it can be delivered in early part of our fiscal fourth quarter.

So there is some timing specific orders placed during the year that can influence how you would want to look at backlog as well..

Okay.

But is it fair to say that whatever is not delivered the following quarter is fully delivered the second quarter out [ph]?.

Yes, we do define our backlog to be what we think will ship in the next 2 quarters..

Okay, fair enough. All right and on a cash flow basis, working capital for the full year, I know you built up some now.

But for the full year, would you expect a working capital build year-over-year for the end of this past fiscal year?.

Yes, we're definitely in a period right now, still increasing inventory levels and with an increased level of accounts receivable. When I look at the end of the fiscal year, because some of this is really going to work through primarily in quarters 3 and 4, we're going to see improvement from where we are now.

But depending on how substantially we continue to grow our production rates, and where the business is at, at that point, there's -- there could be a supportable level of business to have increased working capital on a year-over-year basis.

But we're going to see some of this play its way through in the next few quarters, really significantly influenced by some of this added rental business..

[Operator Instructions] Our next question comes from Barry Vogel with Barry Vogel & Associates..

A couple of questions for Sarah. First, can you give us some color on your stock repurchase program? I noticed in the cash flow statement you repurchased $5,561,000 worth of stock.

A, can you tell us how many shares you repurchased? And what's your attitude at current price levels as far as your program?.

In the quarter, we have purchased approximately 210,000 shares of stock. So on a average, we paid $26.46 for the first quarter. And similar to what we said on previous calls, we're continuing to look at that as a way to potentially utilize our cash. We have approximately $34 million left on our outstanding repurchase authorization.

And it's a continuing evaluation. But that's been an area where we've been active, and if you look over -- especially the last 18 months, it's been a significant use of our cash..

I have another question on color. Can you give us additional color on this large rental order, which is highly unusual? I don't ever recall you talking about any large rental order. In fact, I think you've been behind the curve in rental business over the past few years.

And I know you had made a comment on one of your last conference calls, you intended to change it. And you probably knew that you had this large order coming.

Can you give us more color on how big that order is in terms of units? What kind of customer it was? And can -- once you do that, can you repeat that kind of order with that customer again going forward in the future?.

Yes, Barry, I'm not sure we're prepared to talk about the level of detail that you'd like. But we'll agree that we went after this business, as we said we would and we are very happy with the results. Our main reason for mentioning it in the read was to highlight the point that, we're busy to the point that we're actually working over the holidays.

That we -- that's a very, very unusual occurrence. So there's many pieces to that. Naturally, you have to be careful in that rental area because there's a lot of pressures against margins. And so that would be the main reason we haven't been a big player in the past.

But we think we've arranged a deal here that really allows both parties to conduct their businesses in their best interest. And it is going to keep us very busy into the spring. The other reason for mentioning it is that the deliveries of those will happen in the spring.

So we start building them here in the winter and with deliveries happening in the spring, it is going to put our cash to work for a while until that moves through..

How many units are in that order?.

Well, I don't know that we can say specifically, Barry, but it's substantially more than we've done in recent history that I can recall..

Okay. Now as far as the towables business. I know what you've done in the last couple of years, I know it's been disappointing so far. And I also know that there's brutal competition among the very large players, which generally speaking has affected margins even though business has been very strong coming out of the recession for towables.

So how long do you have to -- have you set a time frame where you're going to just continue to, let's say, breakeven to making some money or losing some money? Do you have any time frame to see if this is going to work or not? And if not, are there any other things you can do to improve the situation?.

Well, no. We don't have a specific time frame. Of course, that will depend on the progress we are making. We said all along that while you're correct that those big guys are putting a lot of pressure on each other, they truly are duking it out as I think you referenced.

There are small manufacturers that are profitable in that space because they've marketed their products or created products that don't directly compete. And I've said all along that, that aligns more with our strategy than it is to be part of that big fight going on at the top of the market share battle.

No intention of going or being there, we just want to make this a profit-generating piece of our business at any level. And that's always been our goal, and that's still our goal. When we do achieve that, naturally we'll have discussions about how to grow it.

But we've got to get it right at any level of revenue before we get real concerned about how big it will be..

Is it realistic to expect you to breakeven in -- for the balance of the year in that business?.

Yes, it's realistic. I mean, Sarah reported that we did breakeven at one point in the previous year. It's just, it's a small business. It doesn't take a lot of exceptions to swing things one way or the other. And we just got to get more consistent in our execution and more consistent in our sales of those products.

So we can get these wrinkles ironed out..

And as we touched on earlier, the Louisville show in regards to the product we saw or we had in the towables side there was very well-received. We were disappointed with the event in the September timeframe for our towables product, specifically.

And listened in regards to the dealer response and made changes and that's what we showed at the Louisville show. So a lot of efforts are being put forth because product is the main key here, and we have to grow that revenue stream with the right product. And it doesn't take much, as Randy highlighted, to flip from the red to the black.

But we're still committed to executing on this line of business..

Barry, I guess I would -- I would add to that, there's other towable acquisition opportunities out there. I'm sure you've read the news and seen those transactions taking place.

And like our competitors, we've had opportunities to acquire some of those same opportunities, and have chosen to work on getting our little piece of business right before we dive in bigger. So I think that sends a signal too..

Now, Randy, the last conference call you had, you talked about new growth opportunities in different product areas that had nothing to do with manufacturing motor homes.

Can you give us some update on as to what's going on in those things you mentioned the last time you had a conference call?.

Yes, there's several things we've been talking about. The transit bus business is still growing. It's still very small, but it is going in the right direction. We have a small amount of orders we're filling there. Naturally, we're bidding on much larger jobs.

We have evaluation units out in some fleets and continue to be optimistic about the potential for that. We have a product that is unique to the industry. And it's just -- it's the nature of that business is slow to develop. And so we're working that very hard. We did do a public announcement on our brand licensing initiative.

We have a partnership with a company called Brandgenuity out on the East Coast, and we're going through that process. We think there's a lot of value in leveraging our brand in ways, additional ways, to what we've experienced in recent history. And we still have our OEM business that generates revenue.

You can see that in our financial filings, primarily selling excess capacity out of our plant. And we are looking at some other opportunities that I promised we would, but just don't have any news to share yet. But we're going to keep working to enhance the potential of this business..

Sarah, are these other opportunities or these other things you're working on, you do spend some money, I'm sure it’s not a lot of money.

Can you give us some idea of the effect on your operating profit in the first quarter on these different attempts to do other things?.

All right. It's just as you highlighted, it would be fair to say they're not significant. I mean, we've been investing on the -- I mean on the Metro Link for a period of time. So that's not a significant amount. But we have production set up for that.

Even specific on the motorized side, we're going to be expanding into Lake Mills that we highlighted and that's going to require some capital expenditures. So all of this is a function of the CapEx number we talked about, which is a larger number for us in 2014. We're looking in total for the year, in that $10 million to $12 million range.

So definitely investing more in ourselves as compared to previous years. And you can see, even in the first quarter, that's up as compared to last year..

At this time, we have no further questions. I would now like to turn the call back over to Randy Potts, Chairman, CEO and President. Please proceed..

Thank you. In closing, I would like to say that we've introduced many very exciting products this year. We have created a very dynamic organization and intend to continue to demonstrate our creativity in the marketplace. As much success as we have had this year, we believe that there is even greater opportunities in our future.

Thanks for joining our call today. We look forward to speaking with you when we report our second quarter fiscal 2014 results on Thursday, March 27..

This concludes today's conference. You may now disconnect. Have a great day..