Ashis Bhattacharya - VP of Strategic Planning and Development Michael Happe - President and CEO Sarah Nielsen - VP and CFO.

Craig Kennison - Robert W. Baird Tristan Thomas - BMO Capital Markets Mike Swartz - SunTrust Seth Woolf - Northcoast Research David Whiston - Morningstar Mathew Paige - Gabelli & Company.

Good day, ladies and gentlemen, and welcome to the Winnebago First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder this conference call is being recorded.

I would now like to turn the conference over to your host for today, Ashis Bhattacharya, Vice President of Strategic Planning and Development, you may begin..

Good morning everyone, and thank you for joining us for Winnebago Industries’ conference call to review the Company’s results for the fiscal 2017 first quarter, which ended November 26, 2016. I’m joined on the call today by Michael Happe, President and Chief Executive Officer and Sarah Nielsen, Vice President and Chief Financial Officer.

This call is being broadcast live on our website at investor.wgo.net and a replay of the call will be available on our website later today. The news release with our first quarter earnings results was 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 the securities laws and involve a number of risks and uncertainties.

As a result, the Company cautions you that forward-looking statements 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 said, I would now like to turn the call over to our President and CEO, Michael Happe.

Mike?.

Thank you, Ashis. Good morning everyone and happy holidays to all. Winnebago Industries’ fiscal 2017 first quarter will be remembered as one of significant change in the right direction for the company.

I will begin this morning's call with an overview of the key performance drivers for our first quarter and then Sarah Nielsen will dive deeper into the details of our Q1 financial results.

We're off to a strong start in many ways in fiscal 2017, as we continue to implement our plan to transform Winnebago Industries ultimately looking to improve our competitive position in the marketplace and drive new levels of growth and profitability in the future.

Our results from the first quarter demonstrate our continued momentum on this path, especially the announcement and close of the acquisition of Grand Design RV that happened within the quarter.

This quarter also additionally reflects our desire to both maintain ongoing important investments for the Company's future and further clean the slate in terms of legacy policies. At the end of Q1, we delivered strong revenue and net income growth while margins remained steady.

Consolidated revenues were $245.3 million, an increase of 14.5% year over year driven primarily by strong growth in our towables business. During the quarter, we successfully completed our transformative acquisition of Grand Design, which significantly expanded our penetration within the attractive still growing towables market segment.

Our topline results benefited from approximately three weeks of Grand Design, which contributed $25.8 million of revenue. With the Grand Design acquisition now complete and given the organic strong growth of our Winnebago towables business, we are now reporting our financial results on a segment basis broken into two segments motorized and towable.

In our towable segment, the consumer demand for towable RVs remain strong contributing to solid results for both Winnebago and Grand Design branded products. Our Winnebago branded towables business continued its upward trajectory with organic growth of 44% year-over-year in the quarter.

During the quarter, we saw solid growth in Winnebago branded retail unit numbers as well, well above 50% and we continue to see an increasing healthy backlog looking forward.

Customers have responded particularly well to our new Winnebago branded towables product offerings including our entry level Winnie Drop travel trailer which has shown specific appeal to younger more active customers.

This strong demand is welcomed as we continue our progress in expanding the quantity and quality of our Winnebago branded towables dealer base. We continue to increase that network resulting in more units on the dealers’ lots.

The strength of our Winnebago branded lineup was on display at this year's RVIA show in Louisville, Kentucky in November, where one of our voyage models, the fifth wheel trailers were formally recognized as a hot new product. On the Grand Design side, we continue to see very solid shipment in retail momentum.

That team had a fantastic Open House event in September in Indiana followed by excellent showings at RVIA in Louisville and then retail events this fall in Hershey, Pennsylvania and Pomona, California showcasing the new interior and exterior updates to the solitude lineup which have been received well by dealers and in customers alike.

The Imagine line of Grand Design travel trailers is gaining momentum as well. And we have just moved into a new production facility in Indiana which will increase capacity by 75% for the Imagine line and gives a little breathing room as well to the other products in their own manufacturing facilities.

We continue to feel as if we can keep up with the strong demand expected in the future in the Grand Design RV business. I am also especially proud of the Grand Design team for receiving the 2016 RVDA Dealer Satisfaction award which they have won every year since their organization was founded.

Overall, the towable market segment has experienced rapid growth over the past several years. We expect this upward trend in the industry to continue and look forward to being even better positioned to compete in this growing market with the addition of the Grand Design portfolio and the emergence of the strengthening Winnebago line.

Turning to motorized, revenues declined in that segment slightly year-over-year in the quarter primarily reflecting the impact of our decision to exit the aluminum extrusion business in 2016. Motorized retail registrations on a unit basis achieved near double-digit growth for the quarter.

And toward the end of the quarter we were encouraged by the material improvement in retail registrations and backlog for the Class A gas product line. While this growth remains below industry levels, we are continuing to introduce new models within our current opening price point series the Vista.

We received strong positive feedback from our dealers during the Louisville event and our accelerating plans to improve our Class A value with even newer product in the future.

Our Class B and C product lines continue to be where the traction within our motorized segment is from a shipment standpoint with strong new additions to our Class B line in particular.

Our Winnebago Paseo is the latest addition to our market share leading Class B catalog built on the Ford Transit van chassis, the Paseo further elevates our market position featuring off the grid camping capabilities and an innovative floor plan.

We also recently unveiled our Winnebago Era product which is an industry first in featuring a slide room that houses a standard power Murphy bed that folds down as needed to form a continuous sleeping space.

Overall, we are working hard to ensure our motorized products meet evolving customer trends and are committed to delivering more consistent levels of product quality and service to build on our recent retail momentum.

Our backlog on motorized while still down from a year ago single-digit percentages was significantly healthier at the end of Q1 F17 than at the end of Q4 F2016 where we faced a 30% negative deficit. Gross profit overall for Winnebago Industries was steady for the quarter.

However, we are confident that we will realize the increasing benefits from the profitability of the Grand Design line in future quarters. We will also continue to gain strategic sourcing traction and execute on our new operational and excellence initiatives.

With that initial overview I will now turn the call over to Sarah Nielsen who will review our first quarter fiscal 2017 financial results in more detail.

Sara?.

Thanks, Mike, and good morning to everyone. Year-over-year first quarter consolidated revenues increased nearly 15% for the quarter or 31.1 million driven primarily by three weeks of Grand Design revenues as well as 44% increase in Winnebago branded total revenues. First quarter operating income was 18.4 million, up over 44%.

Net income was 11.7 which increased 37% and diluted earnings per share of $0.42 improved 31% over the prior year.

As illustrated in our consolidated statement of income, there are a number of significant items positively and negatively impacting our first quarter of fiscal 2017 which I'd like to cover in more detail as well as provide context as to how these items will impact our financials going forward.

The first significant item relates to post retirement health care. Over the past fifteen years, we have made many changes to this program as it was a significant unfunded obligation and as a result we also had numerous communications with our planned participants throughout this time frame.

That brings us to this fall, where we announced the final determination of the plan to our retirees and participants.

Our decision to terminate this plan effective January 1, 2017 resulted in a post retirement health care benefit of $12.8 million or $0.31 per diluted share net of tax compared to prior year post retirement health care benefit of $1.3 million or $0.03 per diluted share net of tax.

The expected final impact of the plan terminations to the remainder of fiscal 2017 is an additional $12 million of post retirement health care benefit income in our second quarter.

After February 2017, the plan terminations will be entirely recognized in the financial statements and there will be no further perceptive income statement or balance sheet impact. Also significantly impacting the quarter were a number of Grand Design acquisition related expenses.

First, we incurred 5.5 million of transaction costs related to the acquisitions that were immediately expensed or $0.13 per diluted share net of tax. We also incurred debt issuance cost of 10.8 million as illustrated in our cash flow statement that were capitalized and will be amortized over the life of the associated credit agreement.

Note that these costs are presented on our balance sheet as a net reduction to the outstanding debt. We expect that we will incur additional transaction related costs in our second quarter as we complete the required associated SEC filings but don't anticipate that these remaining costs will be material.

Based on the allocation of the purchase price to the net assets acquired and the liabilities assumed, using outside valuation experts, we established intangible assets with a definite lives of 105 million which included dealer network, outstanding backlog, non-compete agreements and a favorable leasehold interest.

The useful lives ranged from less than one year for the backlog to 12 years for the dealer network. Amortization expense related to these intangibles with $2.1 million in the quarter or $0.05 per diluted share net of tax.

The remaining amortization expense to be incurred in fiscal 2017 is 22.6 million which will be heavily weighted to our second and third quarters due to the accelerated amortization of the backlog.

Lastly, interest expense of $1.1 million or $0.03 per diluted share net of tax is related to the newly established asset base loan and term loan agreements as we borrowed 353 million on November 8 to fund the acquisition.

All of the debt under the AVL and the term loan are currently at variable rates based on LIBOR which were 2.4% and 5.5% respectively during the quarter. We are providing non-GAAP performance measures in our press release today of EBITDA and adjusted EBITDA as a comparable measure to clearly illustrates the effect of all the items I just reviewed.

Such non-GAAP financial measures should not be considered superior to as a substitute for or as an alternative to the GAAP financial measures presented in the news release. Thus on a comparable basis year-over-year adjusted EBITDA was 14.7 million compared to 12.8 million last year, an increase of nearly 15%.

As Mike mentioned earlier we have begun reporting segment results for the motorized and towable segments as we reevaluated this topic given that Grand Design acquisition and the growth of our Winnebago towable business.

We have always presented a fair amount of motorized and towable data and will now add adjusted EBITDA as our main measure of operating performance.

With respect to the motorized segment, motorized revenues were down a little over 1% year-over-year reflecting that impact of the company's exit of its aluminum extrusion business to outside customers which reduced revenues by 5 million in the quarter.

Total motorized deliveries rose 4.1% year over year with the mix shifting towards class B and C products. ASP for the quarter declined 2.9% reflecting this mix shift. Segment adjusted EBITDA was down 14.5% on incrementally higher expenses related to workers' compensation and costs associated with ramping up the new Oregon production facility.

From a towable standpoint revenues rose nearly 200% year-over-year on the addition of 25.8 million in revenue from the Grand Design acquisition. As we previously noted, on an organic basis, Winnebago branded towable revenue grew over 44% in the quarter.

Towable deliveries grew at a rate in excess of recent industry trends as a result of the greater penetration of our new products and further expansion in our distribution base. We believe we can continue to achieve growth in excess of the overall total market projections for the remainder of fiscal 2017.

The addition of Grand Design resulted in the nearly 20% higher ASP in the quarter, primarily due to a greater proportion of higher priced [Indiscernible] unit. Towable segment adjusted EBITDA was 4.7 million which increased by 3.6 million over the prior year.

Turning to our balance sheet, you will see several changes in Q1 related to the Grand Design acquisition and benefit plan termination.

As compared to our year-end balance sheet, total assets increased 492 million due mainly to the addition of 500 million in goodwill and tangibles associated with the Grand Design business, 48 million in inventory and accounts receivables acquired offset by cash paid of 60 million.

The main liabilities established due to the acquisition includes short-term debt of 7.6 million, accounts payable and other short-term liabilities of approximately 20 million, warranty reserves of nearly 13 million, a deferred tax liability of over 10 million and long-term debt of approximately 335 million.

Lastly, long-term liabilities declined 7 million due to the post-retirement health care plan termination. Before I conclude I want to recap just a few items, we will see one more quarter impacted by our termination of the post-retirement health care plan. In the second quarter of fiscal 2017 we expect the $12 million benefit related to this line item.

Our amortization expense for the remainder of 2017 as I previously mentioned is expected to be approximately 22.6 million which will be weighted most heavily towards the second and third quarters. Beyond fiscal 2017, we expect amortization to be roughly 8 million annually for 2021.

Our baseline expectation for interest expense for the remainder of the fiscal year which includes amortization of debt issuance cost is between 15 million to 16 million which of course is dependent on interest rates and the amount of debt paid down during the year.

The overall effect of effect of income tax rate for the first quarter of fiscal 2017 was 32.4% compared to 33.6% for the same period in fiscal 2016. The decrease in effective rate is due primarily to a reduction in the liability for an uncertain tax provision related to a favorable resolution of a state tax matter during the quarter.

We anticipate that our annual effective tax rate for the remainder of the year will be close to 34% when considering the accretive impact of Grand Design to our overall consolidated results. This concludes my review of our quarterly financials. I will now pass the call back to Mike for some final comment..

Thank you Sarah, before we turn to the Q&A section I just wanted to take a few moments to highlight the progress we have made toward bringing to life someday our strategic visions and some of the exciting initiatives we have in store for the remainder of fiscal 2017. Make no mistake 2017 will be a significant bridge year of sorts.

There are lots of moving pieces happening at Winnebago Industries.

We have a large new business in Grand Design to integrate, many new leaders to assimilate, a new ERP system to continue to implement, a new West Coast manufacturing location to ramp up, operational excellence initiatives to start, new product development which must accelerate and many, many, many more areas to improve.

But we do believe that we are putting the Winnebago train back on the tracks and moving productively forward hopefully in a net positive way. Across the organization, our focus has been on aligning the entire team around a common vision of becoming a leader in outdoor lifestyle solutions.

This will permeate our entire organization and drive us to provide our customers with a truly unsurpassed experience in the future. Within the RV industry, we will strive to provide the best overall experience to our channel partners and end-customers even if we are far from the biggest manufacturer.

We will however also give ourselves the permission to have profitable growth streams to our portfolio in the future if they fit the lens we are beginning to develop from a new business development standpoint around the outdoor lifestyle arena.

You have also heard me speak before about our desire to build a performance culture at Winnebago one with greater accountability and passion to drive out waste but constantly increase and create customer value. This starts with a strong leadership team which has been in transition since earlier this calendar year.

In this first quarter of 2017 we added not only strong operating leaders in Don Clark and Cam Boyer from Grand Design RV, but also the strategic advisory services of Grand Designs co-founders Bill and Ron Fenech. Our industry specific talent has grown immensely.

In addition, we recently welcomed two other new Winnebago executive leaders in Jeff Kubacki, Chief Information Officer and Chris West, Vice President of Operations.

Jeff will be instrumental in modernizing our IT infrastructure, co-leading our EPR project to successful implementation, building a business intelligence culture and working with engineering on technology that faces the customers and betters their experience.

Jeff is already developed strong instincts about the necessary improvements to increase the probability of success with our ERP project and increase its future positive impact to the business. Chris West has responsibility for Winnebago branded manufacturing, supply chain, quality, safety and lean value streams.

He has immersed himself quickly in the unnecessary complexity of our legacy manufacturing operations and has launched several operational excellence initiatives already. We will look to drive higher levels of manufacturing productivity, efficiency, quality, safety, employee satisfaction and margin enhancement in the future.

Our West Coast manufacturing and service start-up continues and we have begun actual production of the first line of diesel products that have been initiated in Oregon. We will make the investments needed to set that plant up correctly. And drive quality in the products that are made there.

These talent additions are necessary to deliver our future incremental results. And all the new executive leaders are acutely aware of my direction about funding change and delivering a return on investment of their own services. Now quickly let's review the Grand Design steps.

This acquisition strengthens Winnebago culturally, strategically and financially. Culturally Grand Design brings a similar passion for how to serve our customers with high quality products and a customer service experience that exceeds expectations.

Strategically the acquisition demonstrates Winnebago’s commitment to enhancing its relevance and share in the towables market, broadening our product lineup and our dealer relationships.

Financially, Winnebago will ultimately become at least 40% larger and materially more profitable, especially so after first year transaction expenses and purchase accounting items happen.

This addition of Grand Design provides Winnebago with an opportunity to continue to fund overall change in our business and concurrently provide our shareholders with a greater return. The integration of Grand Design is well underway.

Teammates from both sides are focused on the following areas; financial reporting, strategic sourcing, IT and human resources. We are doing the work necessary to build the needed connections between Grand Design’s new parent Winnebago Industries and Grand Design.

But we are also being very careful to further empower and enable Don Clark and his team to continue their upward and impressive momentum in the market.

The Grand Design team is already bringing immense energy to the Winnebago culture and we are looking forward to foster the sharing of best practices as appropriate while taking further advantage of our increased scale talent and customer confidence.

Dealers are very excited about the future for Grand Design and they won't hesitate to weigh in with Winnebago Industries if they feel the Grand Design business model is threatened in any way. As I mentioned earlier, the RVIA show recently concluded and both Winnebago and Grand Design head strong showings.

Anecdotally, the feedback from the dealer community is that all recognized changes happening at Winnebago Industries and that we are headed in the right direction to ultimately better serve their needs. We have much, much work to do to continue to earn their business and we are committed to seeing our dealers succeed.

For the balance of 2017, we will remain focused on driving increased profitability, net the expenses from the Grand Design transaction. We now have a company with greater scale, a more balanced portfolio, another other strong brand, a strength and leadership team and a resolve to deliver increased value to our shareholders in the future.

We have set the foundation for consistent execution against the following long range strategic priorities which will guide us for 2017 and beyond. One, we will continue to invest in our future by strengthening our core products, look for additional ways to leverage our strong brands and investigate expansion into new markets.

Two, we will explore new ways to further build our performance culture and instill operational excellence and discipline across the organization.

And three, we will do all of this with a common focus on providing dealers and end-customers with the highest levels of quality and service which leads to a great experience and lifetime brand advocates ultimately resulting in long-term value for our shareholders.

Now before I open it up to questions, I would like to end by thanking all of our employees at Winnebago Industries for their hard work during the quarter and also welcome the Grand Design employees to our family.

I'd like to thank them for again their hard work wish them a very Merry Christmas and a happy holidays and also like to thank all of you for your time today and wish you happy holidays as well. I will now turn the line back over to the operator for the Q&A session. Thank you..

[Operator Instructions] And our first question comes from Craig Kennison of Robert W. Baird. Your line is now open..

Good morning, thanks for taking my questions and thanks for the detail in the press release.

On Grand Design, can you share with us how accretive it was to GAAP earnings during the three weeks that you owned it? And can you project for us any expectation for the accretion in fiscal 2017?.

From a Grand Design standpoint now that we have incorporated the segment disclosure it's going to be a combination of the two. And as we highlighted from a revenue standpoint, we saw the strong impact to our quarter just with three weeks of that flow through.

And from an overall towable standpoint as we shared from an adjusted EBITDA standpoint we had very strong growth in that segment year-over-year and a significant component of that was certainly on the Grand Design side of the fence. But still great performance from our existing Winnebago branded towables in for - performance as well.

So from that standpoint there is significant amount of business combination disclosures that we'll be filing when we release our 10-Q which is planned for next week. But the critical information and the framework that we’ll use on a go-forward basis we'll be breaking out the two segments as we shared this morning..

And then, Mike, you’ve talked about working on unlocking trapped capacity in your business. Could you first talk about some of the things you're doing to unlock that capacity.

And then second to what extent is capacity an issue for you as you move forward in other words are you enable to ship as many products as you'd like to based on some of that capacity constrained. .

I'll start with probably the second half of your question. In my opinion at the current time, capacity is not an issue for the motorized side of our business. We are more focused on ultimately driving increased demand which has to happen in that business.

With the addition of our Oregon plant, which is coming out of the gates here concurrently as I mentioned with production of the first set of diesel models that are moving out there. We have less and less concerns about future capacity on motorized.

You asked about some of the reasons, maybe I feel confident that we can unlock capacity in motorized in the future and I'll just mention a few of them and try not to get into the weeds but there are some material inefficiencies that are happening within the manufacturing process at Winnebago that don't allow us to realize our potential on a daily basis from an upward standpoint.

One of those items as an example is missing parts to the line. Now ultimately we believe we get the product right, but we have too many instances where the important assembly teammate at Winnebago does not have all the parts they need to complete their task in the station that they're working on.

And that work then is either passed further down the line or it has to be completed in a rework loop of sorts at the end of the process. And that's just one example where if we can dramatically cut down on the missing parts within the assembly line process, we can dramatically increase efficiency on the line and output.

The other element and again, I won't get into details, is there's probably higher than average turnover in certain aspects of our manufacturing environment. We'd like employees to join Winnebago Industries and spend their entire career if not the majority of their career with us.

When we see material turnover within the manufacturing environment that in my opinion is higher than it needs to be that leads to inefficiency and rehiring, retraining and ultimately employees that have various levels of different productivity on the line.

So those are just two examples but as we look to really transform our motorized manufacturing and supply chain processes there are other instances as well.

All of these will take time to improve the processes and drive the waste out, but I'm not going to sit here today and say that our motorized performance which continues to be relatively steady and not growing at the rate that we'd like it to be that's not due to capacity issues. We have work to do on the demand side most importantly. .

And if I could Mike, just a follow-up on that point you talked about some inefficiencies in the process.

To what extent do you think you can convert that into cost savings and making your product more affordable and therefore maybe win some of the market share battles out there?.

Well, certainly we hope that any of the savings that we find in the organization financially that will spend that in a variety of ways. I mean either reinvesting in the business to drive future growth or obviously dropping it to the bottom line to improve our profitability.

Our ability to compete at some of the value price points that have emerged during this RV recovery, especially in the motorized side on Class A gas, in my opinion is probably more of a design and consumer insights challenge versus a manufacturing challenge.

I actually have confidence that we can make whatever product is needed to compete at those price points and potentially be marginally profitable there. It's just that our team has not been on sort of the leading edge of that trend in the last year and a half.

And we are starting to change that, I don't want to overemphasize any optimism here but this was the first quarter that we had seen positive retail in Class A gas in quite some time.

Now I'm not suggesting that will always happen in the future but that's a good sign that potentially some of the work we've been doing on introducing extended and lower price floor plans in the Vista series are working.

And I can't share details but we realize that our existing product isn't going to be the only answer to attacking that in the future. And there are certainly activities underway to increase the competitiveness of our Class A gas line in the future. A little bit too late for my taste coming into the business this year, but nonetheless we'll get there..

And finally just tax policy, have you given any thought to how you might use any windfall from a lower corporate tax rate..

Obviously that expands I guess our opportunity from a liquidity standpoint either for some of the topics that Mike touched upon strategically or we also have debt pay down priorities as well. So I think that can positively impact us in a number of ways..

Thank you. And our next question comes from Tristan Thomas of BMO Capital Markets. Your line is now open..

Two quick questions, could you maybe talk about with the inclusion of Grand Design even though it was only for three weeks in the quarter, why was gross margin flat, maybe talk about some of the offsets there..

Well, we touched upon from a motorized standpoint that's where we saw pressure on a year-over-year basis and as noted in my prepared remarks and in the earnings release year-over-year our adjusted EBITDA was lower and that was primarily a function of some higher worker's compensation expenses as related to the prior year and also some costs associated with the ramp up of our diesel manufacturing facility in Junction City, Oregon.

So those are the two key drivers on the motorized side that impacted margins and we certainly saw really positive performance on the towable side of the business..

And then kind of a two-part question.

First, can you maybe give us a time on for the rest of the Oregon production ramp? And then also for the new Imagine facility in Indiana, is that fully staffed yet?.

I'll speak to both of those topics. And again, I'll start with the second half, Tristan this morning of your question.

The Imagine, the new facility in Middlebury, Indiana, which the grand design team is now using on their Imagine travel trailers was opened several weeks ago and they are in that facility, making product and continuing to ramp their production up. What excites us about that is that we think there is significant runway within that business overall.

And certainly within the Imagine line, we now have the space we need to realize significant growth in that category.

It also allows some of the manufacturing space that was previously occupied by that to be utilized now by the other Grand Design lines and so we have a little bit more room for some of the other Grand Design lines to grow as well in the future.

So with that business and the Grand Design team has done a good job of this through the years, we will work carefully with Don and his team to make sure that we continue to have the capacity to keep up with their rapid growth.

From a Winnebago motorized standpoint and our West Coast facility, as I indicated, we are beginning formal production out there of one of our diesel models. We've gotten units to dealers. We've retailed several units and that will be a gradual ramp up week over week, month over month throughout the year.

And we'll certainly match that to the demand that's appropriate for the Winnebago diesel models that are out there. I will tell you, we will still have Winnebago diesel models that are still being made in Forest City for some time, including our lower priced Forza line, which will remain in Iowa for some time here in the future.

But the lines that are out there are being moved sort of one at a time. We really have to make sure that in a new manufacturing environment that we get the quality right.

And as you can imagine for a company that's had most of its motorized manufacturing in north Iowa for most of its life, there are certain complexities with the supply chain and moving production to the West Coast that we've been able to work through.

So by the end of the year, we will have, end of the fiscal year, end of the calendar year, we will have manufactured several hundreds of units out there, but that will be on a graduated ramp up here over the coming quarters..

Thank you. And our next question comes from Mike Swartz of SunTrust. Your line is now open..

Sarah, sorry if I missed it, just some housekeeping questions.

Did you quantify the ERP expenses that flowed to the P&L this quarter?.

They were very similar to the prior year. So, it wasn't any of the prepared items that I had highlighted earlier. So from an investment standpoint, there's a piece that’s capitalized and there's a piece that is immediately expensed. And this year, it was approximately 1.2 million compared to last year of 1.4 million.

So a very similar level of investments quarter over quarter..

Okay. And we should expect that kind of run rate to continue second quarter and then I think it kind of falls off from there.

Is that right?.

From an ERP standpoint, as Mike highlighted, we have a CIO that just recently joined and we’re very excited to have him, one of our key leaders, working from an ERP implementation perspective as we finalize the last components of the AA process and each quarter will continue to kind of give a reasonable update as to where we are, but from the standpoint of the go forward run rate, it should be pretty similar on a year-over-year basis at this point..

Okay. That's helpful. And then in the expenses in the first quarter related to Grand Design, I think it was 5.5 million.

Were there any additional expenses in cost of goods related to the step up of inventory?.

Yeah. There was a small amount of step-up from that standpoint of the finished goods inventory that was purchased, but it was not a material amount, it was approximately $300,000 that impacted that first quarter of ownership and that's now behind us..

Okay. So there won't be any of that going forward..

That's correct..

Okay.

And I did hear you say the kind of ongoing piece of amortization related to Grand Design will be 8 million a year?.

Yeah. That was the out years, starting after 2017 and inside the remainder of 2017 in this fiscal year, that's an important piece. I just want to make sure is clear because we have a lot of expense yet to be incurred in Q2 and Q3 notably, well in excess of $10 million a quarter.

And so for the full year, we’ll be almost 25 million of amortization expense. By Q2, it will tail off to a little over 2 million. And that's a function of the backlog intangible that was established that has a very, very short life. So it’s really just amortized within just a few quarters..

Okay. That makes sense. And then just from a CapEx perspective, how do we think about that in ’17 and beyond. I know you've still got some of the ERP costs coming through. You've obviously got Oregon in there, incremental CapEx from Grand Design.

So how to think about that I guess, ’17? And then I guess what's the normalized rate going forward?.

That’s a really good question. And each quarter, as we file our Q, we update our range if you will in relation to what we anticipate the year to look like. And, you can see in our cash flow, where we started on this fiscal year. We're looking the total year to be in that range of 15 million to 17 million.

But that's always going to be dependent on how quickly or slow we are to approach each project that we have on the docket. And it's a combination too of incorporating from a Grand Design standpoint that incrementally changes anything on the go forward basis, but that's the thought process that we have right now of the level of investment.

So, we'll continue to keep updating that each quarter as we have better visibility on a go forward basis. To your point on, there is a certain amount of maintenance spend and then there are the investments in specific projects.

So historically, we had, prior and this is going back quite a few years now, but we would have a depreciation expense that was similar to what we would be investing on an annual basis and we're certainly not at that equilibrium at this point, but once we have all of the big projects nearer to completion, then we will have a little bit more of a normalized flow to be talking about going forward..

Okay.

And then just final question, maybe for Mike and this is your first RVIA event since you’ve come over to Winnebago, maybe just curious your thoughts on feedback from dealers on product, et cetera, strategy that you could highlight for us?.

Yeah. It was my first RVIA event in [indiscernible]. It was good to be there and to understand some of the dynamics within that particular tradeshow. I’ll try to be as objective as possible, but we feel very positive about the dealer sentiment towards our company right now.

We have a lot to improve on and our dealers are very good at telling us what we can do better.

But I think our dealers, both on the Winnebago side, but on the Grand Design side as well, are seeing a company that's on the move and one that is going to compete feverously for their business in the future and will hopefully deliver them even better products and hopefully for them improve profitability in the future.

So we're having some very good conversations with dealers at multiple levels in their businesses, whether it's the principals, the general managers, sales or service managers. And we feel that a general sentiment is that the dealer base is optimistic about where Winnebago is headed now.

To be fair to the dealers and do ourselves, we need to deliver on our ambitions and the things that we're talking about and I think the Grand Design acquisition in Q1 of F17 was a pretty important sort of proof point for them emotionally that we're willing to make the investments we need to compete more effectively in the future in this industry and the Grand Design business is a healthy business.

They have a wonderful set of dealers as well. And their dealers are optimistic about Grand Design and cautiously looking towards Winnebago to not only I guess support Grand Design, but to make sure that we don't negatively impact the way they go to market and that's our intention is to continue to empower the teams.

So I was pleased with the quality of the conversations. I can highlight certain spots, in terms of product, our towable line on the Winnebago branded side is getting better. Our fifth wheels are up more than the industry average, but we have significant work to still do there.

Our travel trailer line though has a lot of momentum on the Winnebago branded side, the Winnie Drop, the mini franchise, micro-mini, mini pluses, those are all doing very well.

On the motorized side, as I mentioned earlier, we walked away very pleased with the amount of orders that we took on our class A gas Vista series and I know we've been battling and not winning in that environment.

And we can't do anything about the past, but we are starting to show some signs of life there that we hope in future calls that you'll see some of the financial traction from too. So lots of constructive criticism, but I think generally we feel as if our dealers are standing behind us as we start to make this change..

Thank you. And our next question comes from Seth Woolf of Northcoast Research..

Hi. Thanks everybody for taking my call this morning. Mike maybe, I wanted to start with you.

A bigger picture question, but as we think about the robust growth you're seeing in your Winnebago branded towable segment, obviously, there's a lot of opportunity there and then kind of think about that in respect to your commentary about for City production where you think there's an opportunity to really expand motorhome production, is the Oregon facility, is it motorhome only, is it, would it be suitable to do some towable out of there.

I mean would it, because it seems like West Coast production is that such a premium right now in the towable side. Just any thoughts there..

Yeah. Seth, I think, first of all, good morning and thank you for your question. This is a, it's a good question. It's a topic that we continue to talk about all the time. The strategy certainly started out last fall even before my arrival at the company. It had a twofold sort of objective in Oregon.

It was to have a manufacturing environment where we could create high quality diesels, especially those that are a little bit longer in length than our current infrastructure in Iowa is able to handle. And we're still very committed to Junction City Oregon being the primary home of most of our diesel line in the future.

Now that being said, I think as we’ve stepped back and looked at our motorized production strategy in Iowa, we've said we can probably keep a few of our diesels a little bit longer in Iowa because of the quality of work that's happening.

Another change I think in the tenor of our conversations and probably something I pushed is to the team is, this facility could be used in the future for other things. And I will just tell you very honestly on this Wednesday morning that we've made no commitments to bring other lines of product out there.

But I think mentally, we're thinking about those possibilities differently than we were a year ago. And whether it's other lines of motorized products that make sense for that facility or it is any of our towables line, I think we’ll take those on a case by case basis. At the end of the day, two things are paramount.

One is we have to make high quality products and two, we have to make money. And I guess if the team can prove that that facility can be accretive in quality and profitability with other non-diesel lines, then we’ll take a look at that.

As you all know, there is significant business done out on the West Coast and even the state of California hasn’t completely rebounded from where it was at the prior peak. So there's probably a little bit more runway even there, but I think we have a more open mind there, but very honestly no current plans.

We're very focused on getting the diesel production set up and these are highly complex products and a different supply chain that we're having to set up versus what we have in Iowa..

Okay. So I was just wondering if it was physically possible. And then you mentioned business intelligence culture as being something you wanted to establish.

Is this trying to go back to some of the ERP changes that are being made and being able to harness the data that you already in more efficient manner or is there something else? Does that mean something else?.

Well, it's related certainly. I mean, when we put an operating system in such as the Microsoft Dynamics AX platform that we're working on today, no doubt that will be the engine that will be able to collect the information that's being generated by our business.

When I talk about business intelligence, what I mean is ultimately applications that give our decision makers and our needle movers in the enterprise the information they need to make the right decision more efficiently and to drive the business going forward.

And as I come into this company and it's been almost a year now, we continue to not have some of the dashboard reporting, some of the exception reporting. We don't operate the business with a CRM system today. There are cost efficient ways to present again business intelligence to decision makers, so that they can use those to make better decisions.

In some ways, at Winnebago, we continue to run the business with a cockpit instrument panel that doesn't have all the readings yet on it. And so we'll do that carefully.

I don't wanted to sound like we're going to put eight figures of IT costs into new applications for business intelligence, but with the quality of the CIO that's been added to our team, I think that there will be some cost effective ways that we can get the information out of the business and present it to our decision makers more accurately and more quickly.

So I hate to be so sort of 30,000 foot level on that answer, but we need better intelligence to be a more competitive manufacturer in the future..

Okay. Fair enough. And then just the last thing, Mike, you mentioned in your prepared remarks that you've seen a little bit of an uptick in the class, class A market, the diesel specifically towards the end of the quarter and I think you said the backlogs are early read on 2Q is positive.

I was just wondering if you could talk about, if you’ve seen anything else from a cadence standpoint in the motorhome business towards the, in the month of November or maybe if you can talk about what retail trends look like over the only 3.5 weeks?.

Obviously, I can’t and won't give you specific Q2 retail information other than I'll say this that the retail momentum that we described in this call on the motorized side is continuing. That's all I'll say. We have introduced at least three new floor plans within our Vista series here over the last three or four months.

And our dealers are receptive to the increased value that they're seeing on that particular class A gas series. In fact, we have three active lines of class A gas products. And year-to-date, fiscally, two of them are positive from a retail standpoint.

So now, we won't begin to get overly confident because that business has dropped precipitously for us and whether we have found bottom or not and we're starting to kind of rise from that, as I said, is yet to be seen.

But it's good to see that we think we're getting some early feedback in the retail environment, but also with orders on some of this improved class A product. As you know, we're focused on the health of our full line and we think our class B and our class C products are pretty well competitively positioned.

But we will continue to try to improve our class A gas position because we certainly know that our friends at the two other large manufacturers in this industry have done very well there..

Thank you. And our next question comes from David Whiston of Morningstar..

Thanks. Good morning. I had a question actually for each of you.

First for Mike, you highlighted the new senior leaders joining the company recently, how much more transformations at the senior management level should we expect? Are you done having people or is there a lot more to do there?.

Well, that’s a fair question given that we've brought in a number of new people. I guess the way that I'll answer that is, we'll continue to put together the team that we think is needed to take the business to where we desire, not where it's at today.

And one of the things that we need to spend more time on in this company from a talent development standpoint are some of the other levels of leadership within the company. We've been very focused on getting the right senior leaders into the business to complement the industry talent and the experience we have.

But we're also going to be looking at some different layers of the organization as well to make sure that we have the right talent in the right places there.

So I can't answer your comments specifically other than, I think, that's sort of an ongoing journey and we reserve the right to have the talent we think is needed to compete and I'm excited about the blend that we have going on here.

I mentioned the team from Grand Design and Don Clark and his two co-founders [indiscernible] these are all very talented, smart, successful RV professionals.

And it's great to have them on our team now, on our side and not only will they continue to use their horsepower to drive the Grand Design business forward, but we're starting to have really good conversations in educating them about the rest of the Winnebago industry's business.

So that selectively and mutually we can find ways for them to help us as well. So it'll be a blend and a journey over time..

Okay. Thanks. And Sarah, in motorized, the press release highlights some higher compensation costs. So I was just wondering if you can fill in the story there as to what's driving that..

Well, the key things that we highlighted from a press release standpoint on the motorized side, we’re really focused from a workers' compensation perspective that were higher on a year-over-year basis as well as some of the ramp-up costs associated with the Oregon production facility. So those are the really the two key points.

From a G&A standpoint, there is certainly some evolution of the G&A spend to the topic you and Mike were just discussing on from a senior leadership standpoint.

And as Mike also highlighted, we're all very cognizant of having to fund and provide benefits for all of the talent that they're really focused on be it operationally or from an IT standpoint or in all areas of the business, from finance, et cetera. So, but the key elements we really highlighted really related to workers' comp and the ramp up..

Okay. And finally, my last question is actually for Ashis, in your last role at Honeywell, you worked in the Internet of Things area. I was just curious if you have ambitions to bring a lot of IoT into the Winnebago product lineup..

Thanks so much. Yes. This is definitely an interesting area where we are looking at it and in our motorized business, we continue to work with our key chassis partners, Ford, Mercedes, Freightliner and others. And in the subsystems area off ERVs, we are also working with our partners.

But we want to be really thoughtful and look at applications and use cases which add significant customer value versus just technology for technology sake. So definitely stay tuned for more on this in the months and years to come. It’s an area we're looking at closely..

Thank you. And our next question comes from Mathew Paige of Gabelli & Company..

Good morning. Thanks for squeezing me in. So you had previously mentioned some strategic options that you are looking at for, to potentially pursue.

In light of that, could you speak to your thoughts on capital allocation as well as your leverage levels and what levels are you comfortable with?.

Well, certainly, our balance sheet has changed significantly in this quarter. For most of the company's history, the debt level has been very low, if nonexistent.

And as you obviously saw this year, we made a very conscious decision to change the balance sheet in order to fund the acquisition of what we think was a, hopefully, will be a great acquisition.

So certainly going forward, capital allocation will be not only used to fund the existing business and to make sure that we're creating the products that we need to in order to compete more effectively, but as Sarah has mentioned, we would like to make sure that we continue to de-lever in the business and we're discussing with our newly formed finance committee on the board what the options for capital allocation are.

We’ve spent a lot of money on a recent acquisition and have a leverage ratio a little bit over two right now that we want to bring down certainly in the next couple of years to something that starts with a one and then probably following that something with a zero. Now, we are bringing a new sense of new business development ambition to the company.

Ashis Bhattacharya, who is on the call with us this morning, certainly hired in part to help us be more active in that arena, we've expressed a desire to maybe even explore some areas outside of the RV arena, but all of them have to be any opportunities that we look at have to be right and we're still defining right and putting some of the lenses together there.

So I think you'll see us focus here especially in fiscal 17 on execution and integration and starting to pay down the debt that we have incurred. And then as we have some time here to do some business development work internally, we’ll hope to put ourselves in a better position in the future to potentially be active again in adding to the portfolio.

But again it has to be the right opportunity however we define that..

Great. And then the other question I had was just looking at the RV market as a whole, where is that near or at prior peak levels. So I guess could you speak to what makes you think we can continue to grow the industry, especially in light of rising oil prices and potential interest rate..

Yeah. That's a great question and it's asked obviously often to a lot of the industry leaders and there's a slight uptick certainly with maybe where rates are headed. And fuel prices have been low for a while.

I would tell you that we feel confident that sort of the net collection of tailwind elements continue to be material enough that we remain optimistic. Consumer confidence is steady, if not strong right now. You have an equity market that has seen a significant uptick, even since the election here in the last month.

Even where fuel prices are today and where interest rates are today, it's very affordable for people to use and to gain access to the RV lifestyle. Financing companies are continuing to be careful, but you can get into RVs today through financing mechanisms and I think the industry has done a good job in two areas.

One, increasing the value proposition of many of the products. You can find affordable entry points, product wise, to the RV lifestyle, not only in motorized, but also in towables. And secondly, with some of the demographics starting to turn here in the US and there's still very much runway left on the baby boomer RV purchase arena.

I mean baby boomers will continue to buy RVs for we believe sometime in the future. But I think the industry's doing a very good job marketing to some of the younger generation of current or prospective RV customers and really appealing to different use cases.

People that are even more active from an outdoor exploration standpoint, folks that are using RVs for more weekend trips, folks that are using RVs for tailgating, for travel youth tournaments, there's any number of increasing use cases.

So we like, I'm sure, [indiscernible] and others are, remain optimistic that there are cautiously several more years of RV upside here, unless of course some of the geopolitical or macroeconomic factors are wildly different..

Thank you. And our next question comes from [indiscernible] of Sidoti. Your line is now open..

Hi. Good morning. Thanks for fitting me in here.

I guess just quickly on Grand Design, I'm not sure if you mentioned this, but I mean in terms of their growth rate in kind of what would correspond to your fiscal first quarter, can you talk about what the organic growth rate was?.

Well, we closed, it was a little under three weeks remaining in the quarter on that acquisition. And so from a revenue standpoint, as we've highlighted, that was 25.8 million of incremental revenues. Obviously, the transaction cost and the amortization et cetera are noted from an income statement perspective.

So you can see that flow through, but it was certainly a significant driver for the growth of our towable segment. But as we've also commented, we had strong revenue growth on our towable Winnebago branded product. That was well over 40%.

So a small piece of the operational activity in the quarter, but impactful and we're excited about the impact it will have for the remainder of the year..

I’ll add on to Sarah’s comments and just let you know that the Grand Design business, like our Winnebago towables business, is seeing double digit revenue growth. I know that's sort of a base statement, but they are currently seeing that type of growth in their business..

Okay. And then just a follow-up. I mean I think the initial, part of the initial talk about Grand Design was that higher margins would kind of boost the overall margin profile of Winnebago. I assume that's still the case.

And I guess, net of any impact that you guys are making internally with corporate development and et cetera, would that be still the case where you expect the combination of the two to have a higher margin profile going forward?.

Well, the expectations for both segments and the business units within the company are that everybody will be increasing their gross profitability in the future and so yes, from a mathematical standpoint here, we anticipate that Grand Design will have an accretive impact to our gross profit, gross margin in the future, but as we've talked about even here earlier today, we expect that from towables, Winnebago branded towables and motorized, Sarah mentioned on the motorized side a couple of the elements they gave pressure on the Winnebago gross margin side.

We are working on both of those, especially the workers' comp. And we are not pleased that the margins in the motorized side were what they were in this quarter and we will be working with that team to again realize stronger performance there in the future.

So stay tuned as those results happen or don't happen, but yes, that's a big focus here at Winnebago is increasing gross profitability..

Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Ashis Bhattacharya for any closing remarks..

Thank you very much. Thanks again to everyone for joining us today as we reviewed our first quarter fiscal 2017 results. We look forward to speaking with all of you again as we review our second quarter fiscal 2017 results on Wednesday, March 22, 2017. Thank you very much and happy holidays to everyone..

Ladies and gentlemen, thank you for participating in today's conference. This concludes today’s program. You may all disconnect. Everyone, have a great day..