Winnebago Q2 Earnings Conference Call: Full Transcript

Operator: Good day, ladies and gentlemen and welcome to the Winnebago Industries Second Quarter 2016 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 follow at that time. [Operator Instructions]. As a reminder, this conference is being recorded. I will now turn the call over to your host, Don Heidemann, Treasurer and Director of Finance. Please go ahead. Donald L. Heidemann: Treasurer and Director of Finance: Thank you, Stefani. Good morning and welcome to Winnebago Industries conference call to review the Company's results for the fiscal 2016 second quarter which ended February, 27 2016. Conducting the call with me today will be 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 at approximately 1:00 PM Central Time today. The news release with our second quarter earnings results was posted on our website earlier this morning. If you have any questions about accessing any of this information, please call our Investor Relations department at 641-585-6160. (Safe Harbor Disclaimers) With that said, I would now like to introduce our new President and CEO, Michael Happe. Mike? Michael J. Happe: President and Chief Executive Officer: Thank you, Don and good morning everyone. I would like to start the call by providing some initial comments regarding my on boarding activities over the first 60 days and an overview of the key drivers of Winnebago's results during our recent second quarter. Our CFO, Sarah Nielsen, will follow by diving deeper into the details related to our Q2 financials, and lastly, I will be back with some initial observations of the challenges and opportunities facing Winnebago in the future including the second half of fiscal 2016. Now first let me say what a privilege it is to be able to join the Winnebago Industries' team during this important time in its rich history. Winnebago is not only one of the RV industry's most respected brands, but it is truly an iconic American brand with a proud legacy. That brand has been nurtured and strengthened through the years by a culture and an organization of devoted employees committed to meeting and exceeding customer's expectations. We also partner with some of the finest RV dealers in the industry to provide a great experience for our end customers so they themselves can create lifelong memories time and time again. I am optimistic that overtime we can build on the solid foundation and history and elevate our market and financial performance within the RV industry. There is material runway in front of us on both elements. My first two months have been spend climbing a very significant learning curve. Much of this period has been on the road visiting our facilities around North America, meeting with most of our top dealers, interacting with key suppliers, and engaging the investor community. The focus has been on understanding the Company's legacy, getting to know our people, engaging with the dealer channel, learning about our products, aligning with Board's expectations and quickly understanding the key strategic initiatives and progress here at Winnebago. It has been a busy period but well worth the emergent. There is still a lot for me to learn. As mentioned previously, there are several key strategic initiatives we continue to focus on that should provide this Company material traction for improved market and financial performance in the future. Implementing a new ERP system will empower our employees to make more timely affective business decisions and be more productive. Transforming our purchasing function, through comprehensive strategic sourcing processes, identifying material short-term cog savings and establishing long-term procurement discipline will have benefits. Opening a new manufacturing and service facility in Oregon will create a more streamlined assembly process for our evolving Class A diesel product line and free up significant hours in North Iowa for incremental motorized production in our Class A Gas and C categories here. Lastly, we will leverage the industry's finest brand and drive increased market share via expanded products, distribution outlets, and enterprise focus around our Towables business. Now moving to the recently concluded fiscal second quarter; fundamentals within the RV industry continue to be strong in the near term. We also believe that the long-term prospects for continued growth in the RV industry remain positive. Factors such as demographics, access to financing, low fuel prices, and a North American population excited to engage the great outdoors, are all contributing to this positive industry momentum. In our second quarter, Winnebago achieved strong sales and profit improvement results within our Towables business where shipments grew faster than the industry due to new product introductions and further expansion of our dealer channel. In the motorhome business however, we are not completely satisfied with the revenue achieved in the quarter especially in light of the solid growth within motorized segment industry wide. While we had very strong bookings in the quarter which resulted in a growing and robust backlog, we are still navigating numerous manufacturing challenges from an output standpoint. First we intentionally added labor hours and lengthened internal inspection processes to increase our focus on product quality, protecting our brand's reputation in the future. This has temporarily decreased our manufacturing efficiency and thus impacted our shipment capacity in the quarter. We are seeing positive early signs that this renewed focus on quality will pay off and are optimistic we will see both lower warranty expense on our P&L and increased productivity as we streamline these product quality processes in the future. Continued work to transition Winnebago out of the aluminum extrusion business and the initial stages of transferring Class A diesel manufacturing to Oregon also had a slight impact on motorhome production output. We are also aware of several trends in the market which have put pressure on our current lineup of Class A products. Our shipment results in Q2 in this segment were improved over Q1. Winnebago has intentionally focused its previous new product development efforts in recent quarters on select segments within the Class B and Class C product areas with some excellent success. In fact, we have number one and growing market share in an attractive Class B category. We will work to address where we can profitably compete in the growing value segment of Class A gas products. We are aware of this market trend and considering specific strategies on how we mitigate this share erosion. Notwithstanding these factors, our team worked extremely hard and achieved materially higher profitability for the Company overall in the second quarter and the team remains intently focused on finding further areas of productivity and profit leverage in the future. Now I will turn the call over to Sarah, who will review the Q2 financials in more detail. Sarah? Sarah N. Nielsen: Vice President, Chief Financial Officer: Thanks Mike and hello everyone. Year-over-year second quarter operating income improved 13% and net income increased by nearly 16% despite revenues being down a bit. The improved profitability was in part driven by a second consecutive growth quarter of gross margin expansion and continued strong results from our Towables group. Additionally we experienced lower general and administrative expenses in the second quarter. Revenues declined 3.8% year-over-year in the second quarter largely the result of lower motorized unit volume of 3.4%. This decreased volume primarily relates to our increased focus on quality. As previously discussed, we have reduced our throughput in an effort to limit rework and future warranty related expenses. We continue to focus on the production of our higher margin products in each category which continues to positively influence our gross margins. Also partially attributable to the revenue decline was our planned exit of extrusion operations which impacted sales by about $4.4 million. Partially offsetting some of the revenues' pressure that we experienced with continued strong results from our Towables group in the second quarter where revenues grew 34% as a result of nearly 58% unit growth over last year on lower price point units. As we are not labor constrained at Towables, we believe that we will continue to generate above market unit growth in this category. Second quarter gross margin expanded 90 basis point year-over-year mostly due to improved product mix which includes better results at Towables as well as overall production allocation towards higher margin motorized products. We also benefited from our strategic sourcing projects. Second quarter gross margin improvement was partially offset by higher manufacturing cost as well as unfavorable trends and warranty expense. While warranty expense trends were better in the second quarter than in the first, we acknowledge that we still have room to improve. However, we believe our efforts to increase labor hours in the area of inspection along with the slower production rates will improve our warranty expense in future quarters. Second quarter operating expenses declined year-over-year driven mainly by lower G&A expenses attributable to increased amortization of post-retirement healthcare benefits. Thus far this year, we have invested $6 million into ERP of which $2.8 million has been immediately expensed. For the remainder of fiscal 2016, we anticipate ERP spending to be similar to the first half of the year. The overall effective income tax rate for the second quarter of fiscal 2016 was 30.6% compared to the effective tax rate of 32.4% for the same period last year. The decrease is primarily result of the passage of the Protecting Americans from Tax Hikes Act of 2015, which extends or make permanent various tax credits that had previously expired. For the full year, we anticipate a tax rate approximating 33%. Moving to our balance sheet and cash flow, I'd like to highlight that our operating cash flow was much improved during this year's second quarter compared to last year as we used approximately $750,000 for operating activities compared to over $14 million last year. This relates to the improved management of our receivables and inventory, notwithstanding the preparation for another robust rental season. As a result, we ended the quarter with a healthy cash balance of nearly $37 million despite capital expenditures up approximately $13.2 million in the second quarter of which $9.7 million was for the purchased of our West Coast facilities. In addition during the second quarter we repurchased just over 127,000 of our company's common stock for approximately $2.3 million at an average price of $18.49 under our share repurchase program. Just over $4 million of availability remains on the program. Finally in the second quarter our motorhome dealer inventory increased 15% compared to the first quarter but was virtually similar to levels a year-ago at the end of the second quarter. The increase on a sequential basis reflects our dealers' seasonal stocking of inventory in preparation of spring selling season. Moving to Towables, dealer inventory increased by 26% versus the first quarter and by 23% on a year-over-year basis. The increases are the results of the popularity of our new products and a successful growth of our distribution base. Within both, motorized and Towables, we continue to believe that there is an alignment between retail demand and our dealers' inventories level. This concludes my review and now I'd like pass it back on to Mike Michael J. Happe: Thank you Sarah. I'll start with an overview of our outlook and drivers for the second half of this fiscal year, then we will provide a more specific update on the strategic initiatives mentioned earlier, and close with some initial thoughts on future areas of opportunity for the company. As I spent time in the field, visiting with some of our largest dealers, the following key attributes about Winnebago's business were consistently mentioned. First, the Winnebago brand name remains extremely strong in the market. Second, our reputation for leadership in the area of product quality is still sound despite some of the recent challenges we faced. Third, our dealer relationships, especially on the motorized side, are rock solid and provide us with the foundation for future growth in motorhomes and the ability to leverage placement of our Towables product line as well. And fourth, our culture is very focused on customer service in retaining strong relationships after the sale with our end customers. All of these factors form a strong foundation to build upon. Looking at the second half of the fiscal year. We remain optimistic that the momentum in our Towables business will continue due in large part to the introduction of enhanced product offerings and expansion of our dealer network, and improved productivity. Over time we believe we have a significant opportunity in the Towables business to even better leverage the Winnebago brand and our relationships with other channel partners while also creating more consistency in the product quality levels, in the sales and service experience that we have historically reached on our motorized side. On the motorhome business, we will continue to face pressure on overall market share as a result of the factors that were cited at the beginning of this call. We are aggressively working to address many of the manufacturing inefficiencies in the back half for fiscal 2016 but we will not compromise the quality of the products we ultimately place into the market, nor the quality of the manufacturing transition of our high-end diesel products that are beginning to move from North Iowa to Oregon. When looking at our product mix in the coming months, we will continue to focus on building our Class B and C market share and deliver a large amount of rental units during the third quarter, consistent with similar timing in previous fiscal years. Additionally, our new diesel powered Class C Fuse product line, which was unveiled at the December RVIA show in Louisville, Kentucky, and was named Top RV Debut by RV Business, is being well received by our dealers and the retail customers. Although the value segment of the Class A Gas category, will continue to be a short-term challenge for us, our brand new Vista and Sunstar 29VE floor plan, featuring an optional tailgate exterior kitchen package was our top seller at this year's Tampa RV Super Show. In addition to managing increased quality during this period of constrained motorized manufacturing, we will stay focused on driving higher levels of profitability than in previous years. Now summer time in Iowa also brings back the Annual Grand National Rally held here in Forest City when more than 1,000 Winnebago owners migrate back to the heartland and celebrate their affection for the Winnebago brand and the RV lifestyle. This event provides our team here with valuable voice of customer feedback on how we can improve in the future and I look forward to meeting many of our loyal customer owners during this event. Now let's move toward a review of a few of our strategic initiatives. I will first start with our ERP implementation which is a systems transformation within Winnebago. This upgrade is long overdue and will revolutionize our ability to manage information, identify value creation opportunities and allow us to make more timely, effective business decisions. Importantly, it is a scalable system capable of supporting our anticipated long-term growth ambitions. There are no material changes to the cost of the overall implementation and timing from our last conference call in December. We still expect ERP implementation to be completed in the back half of fiscal 2017. Our next initiative is the expansion to the West Coast through the new manufacturing and service facility in Junction City, Oregon. Having had the opportunity to spend several days in the region reviewing the project and the campus in person and visiting with our local dealers in that area, I am highly encouraged by the potential this project can have for Winnebago in the future. There is immense energy within the company and the local community to help establish and start up a successful operation. Opening a new plant especially one focused on high end premium Class A diesel products is not a simple undertaking. We are using this opportunity to set up our entire value stream in the most efficient way possible from the very beginning of this plan. There are no material changes to the previously communicated costs or timing of this initiative. The first field production units are in a process as we speak and our goal is certainly to ramp up to a robust manufacturing schedule by the end of fiscal 2017. We will have significant incremental capacity for additional diesel products out that facility in the years that follow. As a reminder, this initiative will also open up significant production capacity in our Forest City campus that will allow us to specifically target increased output of Class A gas and Class C products. No doubt we wish we had this extra production capability right now as the industry continues its upward progress, but the work is started and we will do this in an organized disciplined manner so there are no implementation start up surprises and we have future success for years to come. Lastly, I have been extremely pleased with work being done by the strategic sourcing team. A major component of this initiative was the introduction of new processes to analyzed in sourced components and commodities and partner with our existing suppliers for increased savings and efficiencies. We have found success with this program in its first full year and it has put a spotlight on further expansion opportunities of the strategic sourcing initiative across the organization as we apply these tools and processes to other areas. Furthermore, the project and its lessons learned will be invaluable as we expand manufacturing in Oregon as there we will be utilizing a larger percentage of third party suppliers on those diesel products as compared to our more vertically integrated model here in North Iowa. We are currently in the process of establishing our savings goals and targets for the fiscal 2017 year. From a strategic standpoint, here is what we'll been focused on in the months ahead. Strategy. I will be working closely with the Winnebago executive leadership team, select key management within the company and our Board of Directors to craft a stronger future state vision of what Winnebago aspires to be in the future and how that is different in a meaningful way from our competitors. Once we agree on that future state vision and our upcoming multi-year roadmap, we will first share it with our valued employees and teammates here at Winnebago and then work to provide you with appropriate visibility to our future strategies. Structure. We will be evaluating our organizational design, our manufacturing footprint, and the accountability and governance mechanisms within the company to ensure that we can get ahead of the business much more effectively than we have in the past and put ourselves in better position to fund and execute the long range strategic plans we will create. People. We will focus on future strategies that result in building an even stronger overall team. This will require identifying and developing current key talent in the organization that can create ideas that will unleash growth and profitability but we will also need to add new skill sets to the organization and create stronger levels of external competitiveness and internal accountability within our culture. We want to have a very healthy work environment internally that allows our employees to share in the future gains of the company. We will also be focused on winning in more effective ways externally. Process. While our new ERP system is likely to help revolutionize our ability to manage what we measure in the future, we will drive a new level of rigor around continuous improvement principles in this business. Given our somewhat inconsistent history of instituting formal CI processes within the company, we strongly believe there is significant value that can be created organically in future years by identifying and driving out waste in a more systematic fashion. Ultimately, we want to capitalize on the power of hand, driving increased market performance via organic and non-organic growth initiatives and delivering improved financial results and stronger returns for our shareholders, and strengthening our customer-centric culture and overall team here at Winnebago. Thank you again for your time this morning. Stephanie, will you please open the call for questions at this time? Question & Answer Operator: Our first question comes from Craig Kennison with Robert W. Baird. Your line is open. Craig Kennison: Robert W. Baird: Good morning. Thanks for taking my questions and Mike I look forward to working with you. First question is to the capacity expansion certainly makes sense to me that for investors looking at where we are at this point in the ERP cycle, there might be a concern about adding capacity at a later point in that cycle especially at the high end were trends have been relatively softer. How does that make sense to you as you at the situation? Michael J. Happe: Craig I look forward to working with you as well. Really as I've come into the company and with the team started to engage in dialogue about both the utilization of our current capacity but also some of increased capacity that Winnebago had committed to late in calendar year 2015, we've early spent a lot of time talking about how we can focus on organic capacity opportunity in North Iowa campus. No doubt we will work Craig to get the Oregon facility up and running. We will not race forward and over-resource that facility and invest too far ahead of where the industry is going but we will have the opportunity obviously to get many of our Class A diesel products out of North Iowa and into an environment where we believe we can more efficiently make them and as importantly they can be less of a constraint in the existing facility here in Iowa. But here in North Iowa we absolutely believe that before we would consider any further new capital investments in capacity here in this region that we have a whole list of internal inorganic capacity creation opportunities that we can start to work with our operations team. Craig Kennison: Thanks and my second questions has to do with credit. Have you had a chance to meet with many of your financial partners? Do you see any opportunity for strategic change in direction like captive finance, and then overall can you comment on the credit environment whether you are seeing credit availability change in any direction? Thank you. Michael J. Happe: Probably I'll start with the last one from an end customer standpoint. At this time we are not seeing a dramatic difference in access to capital or financing from an end customer standpoint, nor are we seeing at the current time our dealers becoming any further constrained in a negative way than what--the way we've been operating here for some time. So that's a good thing. The product is still flowing from a retail standpoint and the dealers are certainly still able to take the inventory they need to drive retail. From an internal standpoint and this is more on sort of Don's realm certainly we have been engaging with some of our financing partners on an ongoing basis as we normally do. From a credit standpoint the company continues to have a very cautious position on the balance sheet with no long-term debt and a good cash position. But we are always constantly monitoring our financial relationships with lenders and institutions that are not only familiar with the company but the industry and we always try to be aware of the access we would potentially need to have in relationships with them should we decide to deploy a new strategy in the future. Craig Kennison: Great. Thank you. Operator: Our next question comes from Kathryn Thompson with Thompson Research Group. Your line is open. Wenjun Xu: Thompson Research Group: Good morning. It's Wenjun sitting in for Kathryn. In your prepared remarks, you mentioned adding labor hours and other actions to fix capacity and quality issues. Could you quantify the specific impact from these actions? Sarah N. Nielsen: Good morning. This is Sarah. We've covered from the standpoint of the few key categories that have driven our margins both on the positive and the negative side and I highlighted it's a function of improved product mix which has been a factor for us for multiple quarters as we really maximize the capacity on that we do have and we also have seen savings from a strategic sourcing standpoint continued of the flow through. So those are the two key positives and the product mix is the most significant of those two by far. And then on the negative side, we highlighted we both have--there is pressure that relates to the manufacturing costs associated with the additional labor and on the focus and to ensure that we're delivering on a quality product as well as elevated warranty expenses so those were two pressures that net down to the 90 basis point improvement. So that is the key drivers that we'd like to share from an external disclosure standpoint to really share with you the key things that are happening inside the quarter and on a year-to-date basis. Wenjun Xu: Okay. That's helpful. My second question is on the current trend. What are RV dealers telling you about a current traffic trends and what types of products are currently selling better and how it is different versus last year? I noticed that in the Class A segment you are not providing the specific unit deliveries but could you provide more color on how trends are within Class A between gas and diesel? Thank you. Sarah N. Nielsen: Certainly, well may be helpful to talk a little bit about the retail demand as that plays out inside this time frame. This is a time of the year where there is a lot of retail shows and Mike touched upon the success we saw at the Tampa Super Show in regards to some of the new offerings we were sharing at that point. Class B for us continues to be very strong in regards to the retail demand and as a result that's a significant component of our shipments and as well as in the Class C category and then from our Class A diesel standpoint, our lower price point, Forza and Solei is performing very well. From a show standpoint, it really starts off in the January month with the Tampa Super Show and then we have Dallas, Seattle, and other various events happening throughout the quarter, and the traffic we've been very pleased with on the retail side in regards to the consumers that are coming into our display and those I guess would be the key points that I would want to touch upon in regards to your question. Michael J. Happe: You know the only thing I am going to add just in terms of some of the dealer visits that I have made here in the last couple of months is that our dealers are while they are certainly aware that the industry has been on an extended run here of goods' upward success, they remain very positive about the continued outlook for RV sales in the industry due to some of the factors that we mentioned in our prepared statements and so many of the dealers that we continue to engage definitely see traffic continuing to come into their stores and they don't see any significant immediate headwinds to getting off to a good start here in 2016. Wenjun Xu: Okay. That's all my questions for today. Thank you so much. Sarah N. Nielsen: Thank you Operator: Our next question comes from Gerrick Johnson with BMO Capital Markets. Your line is open. Gerrick Johnson: BMO Capital Markets: Hey, good morning. Sarah, first question perhaps you could give us sales by category motorhome versus Towables and maybe the ASPs by classes like you traditionally have done in the prior calls and then also I want to ask about Class B. You just talked about Class B retail still being strong but it looks like it's a first time your Class B shipments are down in about three years or so. Are you seeing constraints there in Class B or perhaps dealer inventories at a higher levels so what's going on with the Class B shipments? Thank you. Sarah N. Nielsen: Well to start answer on the ASP side from the standpoint of my prepared remarks, I highlighted that on the motorized side we really saw that substantial the linkage of our volume and our units because ASPs on the motorized side were essentially flat in the quarter on a year-over-year basis. From a Towables perspective, our ASPs were down approximately 16% and that was a result of really strong sales of new products at lower price points that we didn't have in the market on a year-over-year basis. But in regards to breaking out ASPs on a five class basis that have been anything that going to be sharing on the call this morning. With Mike's arrival, we've really taken the opportunity to reevaluate what's required for us to be disclosing whether competitors in fact disclosed and what business information that we think is very important to share with you. So we want to be very mindful of disclosing information that could put us at a competitive disadvantage and that has resulted in certain changes of disclosures we have made verbally on the call and in our external communication so that is a little bit of change. We've taken the opportunity with a new perspective to really sit back and evaluate and we're going to continue to benchmark ourselves with those in the industry and outside of the industry on that front. So maybe lastly moving on to your questions on the B deliveries. That retail demand for that product is still very strong. We look at where the demand is, it's not a function of any weakness or softness in the demand. We've highlighted that we slowed down a bit in the quarter to ensure that we are focusing on delivering quality products and so that is really the key story in regards to why unit deliveries will be up or down at any certain points. It was more of a--we have to improve some of the internal processes and we are working very hard in that to be able to timely deliver what is demanded in the marketplace. Gerrick Johnson: Okay, got it. Thank you Sarah. Operator: Our next question comes from Mike Swartz with SunTrust. Your line is open. Mike Swartz: SunTrust: Hey. Good morning, everyone. Just wanted to touch on similar commentary around product quality, warranty costs and give us maybe a little I just guess reference, you know what are warranty costs looking like right now and I guess what is the benchmark or what's the standard you're trying to get to and any kind of color around timing of when we can expect to hit that target? Sarah N. Nielsen: From a warranty standpoint, we really hold ourselves to high standards and so when you compare ourselves to maybe what would be similar to others, it's a little bit of a difference on level and so that is I guess at first and foremost I want to highlight in regards to the level of warranty spend and as a relation of our revenues. So, we are normally in that, about 1% to 1.5% range and we're a little bit at the higher end of that point of revenues and that is an area we have been focusing on for multiple quarters. Obviously the tail on warranty can be very long in regards to what's in the marketplace now and when we had originally built it and you look back in the last few years what's a significant increase of our production capacity in that fiscal ‘13, fiscal ‘14 and then the interest is--on ‘15 and the significant amount of new employees that we have hired and having the appropriate training in place and managing a lot of new products that we brought to the market. All those are factor's where there is risk in regards to ensuring that the product quality is where we want it. So, in the last six months we've really tightened in regards to looking at the inspection process and we have to drive it back to the line and having the units come up to lines in a completed state and that's where we're focusing our energies and there's been a lot of progress made and we're working very hard on that. Mike Swartz: Okay, thank you and then just with the Renault business, just remind us I know you've--gave us a little color on last call. This sounds like it's going to be very similar to last year in terms of sequence in the third and fourth quarter but just in terms of size or ASPs is there any way you can frame that for us? Sarah N. Nielsen: Well the third quarter is the big Renault quarter for us and it is going to be up in that 10% to 15% range over last year and last year we had a little bit of a dynamic where there is some Renault products shipped in the early part of the fourth quarter and so this year it's all for the most part planned to be delivered inside of Q2. So it's very much an opportunity and exciting part of what our deliveries are going to be in the next three months and it's part of story of our backlog increase on a year-over-year basis, but those I guess are few key points to answer that question. Mike Swartz: Okay. No, that's helpful and then just finally, I think Sarah you said that ERP costs were about $2.8 million year-to-date--fiscal year-to-date. Sarah N. Nielsen: That's correct. That was fiscal year-to-date, yes, so is approximately a million for expensed in both Q1 and Q2 on ERP that was immediately expensed. Mike Swartz: Okay, that was my question, and were there any incremental sourcing costs or any cost from Oregon flowing through the P&L in the second quarter? Sarah N. Nielsen: We're definitely ramping up and starting up and so there will be some costs associated with that. We are working hard to ensure as Mike highlighted that we approach that in line with our plans and the time table and setting it up in a manner that allows us to really improve the whole flow of the production process with that Class B or Class A diesel product. Mike Swartz: Okay. Thank you. That's it from me. Operator: Our next question comes from Seth Woolf with North Coast Research. Your line is open. Seth Woolf: North Coast Research: Hi. Good morning, everyone. Michael J. Happe: Good morning. Seth Woolf: Good morning. I just wanted to start off with the Class Bs and Cs kind of follow-up on point Gerrick made earlier. I understand you guys are kind of recalibrating your production capacity and you're putting more focus on the Bs and Cs away from the As, but I was really surprised to see the declines especially considering that the Bs are coming out of Lake Mills where you haven't talked about as much labor constraints and then also with the Cs I would have thought just with the channel fill associated with the Fuse alone we would have seen a better number than -- I was just wondering if you could elaborate? Sarah N. Nielsen: There really isn't any additional commentary probably to provide than what I mentioned before. We struggled in regards to delivering what we'd like inside the quarter and that's a little bit on the backlog dynamic as well as we need to improve the timeliness and delivering the products that our dealers are looking for inside the quarter. So it's a function of being able to do that in the time frame. That's ideal--not a function of that demand on the private dealers. Michael J. Happe: So if I might just add to that, certainly as I have come in and started to learn the business, retail is definitely a king and if we can maintain significant retail momentum in a category like Class B for example, overtime the shipments will certainly normalize over an extended amount of time and as you've just mentioned, we are definitely trying to balance a certain mix from a production schedule in line with increasing quality on several different categories and I would say if you look over an extended period of time, we're still very pleased with shipments in Class B as an example over the first six months of the year and we continue to have a good backlog position there and dealer inventories are definitely inline. So yes, if you look on a three-month year-over-year basis at times probably the way that this business for us is still slightly constrained on the motorhome side, you may see some irregularities mix-wise every now and then and but if we look over an extended period of time, I think you'll see those play out in line with what's probably happening in the market. Seth Woolf: Okay that's helpful and then I guess as we look at the backlog, was there any of the new Class As that are going to be produced in Junction City? Is there any of that in there and if so could you maybe quantify what the impacts would be? Sarah N. Nielsen: What we're focused on doing is getting the plant up and running and it's a product that we can make in smaller quantities here in Forest City today. Mike touched upon, we have an opportunity to take a pretty complex product out of this campus and build it in a more efficient way in a different location. So we do have the capabilities of producing a small amount of that product here. So it's -- the demand on for example the 45-foot offering that we showed at Louisville Show and at the Tampa Super Show to that extent is included in the backlog but it's more a function of how much do we have the capacity to build and where will that be built. What we're working on right now to have an opportunity to deliver more to the marketplace in timely fashion. Michael J. Happe: You know, I'll just add to that that this is not just a manufacturing move for existing Class A diesel products. There is really a holistic effort here at Winnebago to improve the competitive position in the future in that category through not just more efficient manufacturing but we are working very much on future products in that category and refreshing and improving the value proposition and even working with our dealer channel to make sure that we have diesel distribution where we need it and with the right dealers and so it's really--my take is right now that this is--again manufacturing is a big part of this. We have to move products from North Iowa to Junction City. We have do that in a cost efficient and timely manner so that we don't give you or the market any surprises. But part and parcel to that, we're going to be working on other parts of the marketing mix so that as those products come rolling off the line in Junction City in the near to mid-future, they are even more effective in the market based on some other factors within our strategy. So more to come. Seth Woolf: Thank you. Sarah N. Nielsen: Thank you. Operator: Our next question comes from the David Whiston with Morningstar. Your line is open. David Whiston: Morningstar: Thanks. Good morning. Just one question for Sarah one question for Mike. As the selling expenses on the comp size basis were up 10 bps in the quarter slightly lower motorized deliveries, is that just a function of the warranty issues? Sarah N. Nielsen: Warranties is in cost-of-goods sold not included within selling. So the standpoint of the key items in selling there is elements of selling that's variable but there are some that are on a fixed basis and so we were basically flat on a dollar side inside the quarter but slightly lower revenues it went up 2.2% of overall revenue. David Whiston: Okay and Mike in your closing remarks, you mentioned on the people side, sounds like you have some skill sets you need get from outside the company. I was curious if you could elaborate more specifically in what you're looking for there that you don't have today. And you also I believe at least twice mentioned the word accountability, and I was just curious to give a more detail as so what you are seeing today that perhaps you don't like? Michael J. Happe: Well let's start with skill sets and I just want to start this answer by reiterating that there is a really good team here existing at Winnebago and employees that are extremely committed to the business. They have extensive pride and what's been built through the years. That being said, this is an organization that we need to evolve in a number of different ways and it will take a little bit of time but I'll just give probably three examples. One is, is we can do a better job here at the company on strategic planning and we need to be more disciplined and extensive across not just the business units but the functions and building the roadmap of where we will be not just within the next 12 months but three to five to even potentially 10 years out from now. So we'll need to do add some help there overtime. Continuous improvement not just in the operation functions but across the organization. This has been a company that has been so focused on rebounding from the downturn of the last cycle in 2008-2009, it has been so focused on building backup its unit production and improving its product value proposition in many areas that one of observations is that we've not taken enough time to even slowdown a little bit internally and do some of the continuous improvement work that ensures that our processes are scalable and that our resources are being spent in the most productive way possible. And so again I think there is an opportunity for us to have some continuous improvement even arguably some lean expertise into the company. And the last area is business development. We will be very focused on organic growth. We do however need to also add a dimension of not of non-organic business development planning to our tool box so that in addition to what our competitors have potentially considered or done on the past, we can be more active in considering what opportunities in the market might not only fit with our strategy but might be financially accretive for the company in the future and so those are just three areas that we definitely have to work on so. The second part of your question was again...? David Whiston: Was also asking about accountability... Michael J. Happe: Accountability yes thank you for the reminder there. It's an organization which strives every day to do the right thing. As I mentioned there is an intense pride in what's been built. What I love about the organization is that there is a focus on meeting and exceeding customers' needs. Very candidly, I think we can set even higher goals for ourselves. We can use the new system or implementing from an ERP standpoint to create metrics and dashboards deeper and more broadly across the organization and we can ask ourselves as executives and our key management and our leaders all across the company to step up and drive improvement in a whole array of different areas. So I just want to I want to match up the ability to gain information more effectively via the new ERP system with a culture that does something with it, that makes better decisions, that creates some stretch goals and we identify owners and teams of owners that are accountable for different factors. So for me that's about execution. We need to execute at an even a higher level so that we can deliver value to our customers and certainly have consistent financial performance at the end of the day. David Whiston: That's very helpful, I appreciate it. Just one follow-up. A lot of this--once you have the ERP system in place, do you think this is a lot of the execution side of it, is this something that you think you can do already with your background from Toro or do you think you need to bring in a consultant from now? Michael J. Happe: Well from an implementation standpoint we certainly are using some outside partners right now to help us implement the system. That's pretty standard for I think most organizations that implement a new ERP system that they get some help from the outside in working with their team to implement it. This is a different system than I used in my past professional experience. But more importantly, the team is excited about the system that's being chosen and every day as implementation evolves, the team is finding new ways to potentially refresh or remake their processes or even quite candidly some of their rolls in terms of how they can gain access to information in the future. So, I think most of our outside help will be used in implementation. Hopefully once we get to sort of the go-live status and that is sequentially staggered throughout the organization, by that time we'll have developed or even may be at times acquired a couple of new full time members that can help lead us to utilizing the system in some increasingly positive ways. David Whiston: Okay. I really appreciate all the color. Thank you. Michael J. Happe: You're welcome. Operator: Our next question comes from Matthew Paige with Gabelli & Company. Your line is open. Matthew Paige: Gabelli & Company: Good morning, everyone. Michael J. Happe: Good morning. Sarah N. Nielsen: Good morning. Matthew Paige: Could you remind us on how much visibility you have on Class A diesel orders and when you get the Oregon plant up and running next fiscal year, are you expecting to fill the plant and need some incremental capacity there? Sarah N. Nielsen: Well I think it's maybe a couple of key point on that question. We have visibility real time on what our dealers are demanding and obviously that can greatly change based on new product offering and the success of product at the retrial level. Now when you're planning out far into the future quarters and months, years what have been to look at where we think the demand will be and what place in that part--of that product segment could we have and where there is a potential. So there is two aspects of that. We certainly know where the that demand is today for ourselves and for others in the marketplace and what's successful and then we can use that information to make plans for the future of course which we are doing. Matthew Paige: Okay. And as you looked at this incremental capacity where are you, where do you stand now against your overall capacity constraints? Sarah N. Nielsen: Well specific to the expansion and what we've shared and Mike highlighted, we are still working towards on this time table. It hasn't changed. We are just opening up the facility itself and outfitting it with the right equipments, I mean laying out the plan in regards to how the product is going to be built there. The goal is that we will be fully operational and running at a run rate that we feel is reasonable by the latter part of 2017. So it's going to be staged throughout the rest of this calendar year and in the first six months or so of calendar ‘17 to get to that point. Michael J. Happe: We should mention as well that especially with the Towable side of our business side and I just want to make sure we emphasize the good results that the Towables team in the Indiana is producing above the shipment growth levels that the industry is seeing. We continue to have capacity in our Towables facility in Indiana that will allow us to grow in the future and hopefully continue to gain market share there too. So you really have to break the capacity question down by business, by now a facility. This a company that went from 10 years ago to having all of its capacity or its manufacturing really be North Iowa, and now we are heading into a period where we'll have the opportunity to make products in Indiana, the opportunity to make products in North Iowa, and the opportunity to make products in Oregon and we'll try to put the best products in the best location from an efficiency and profitability standpoint and outputs standpoint. But it's really a new state of normal that we're heading into for the organization. So just wanted to remind you where the Towables, we are growing and we have capacity to grow in that business in the future as well. Matthew Paige: All right and that's really helpful and a nice segue to my last question is, Mike now that you've had some time with the business, where is your final goal for the Towables business and how long do you think it'll take you to eventually get there and do you need to do an acquisition to be able to achieve those goals? Michael J. Happe: Well I'll say this. The Towables business is an important part of Winnebago's current state and it will become an increasingly important part of our future state. We will work very hard from an enterprise level to provide the Towables team the resources they need to grow that business in a manner that's consistent with the brand and the service and sales experience at we want our channel and our end customers to have. I would say that the answer to your question about the goal for the Towables business is quite candidly, we want to be more relevant tomorrow than we are today. If you go out and look at many of our fierce competitors, they have significant market share in the business today built over many years of their own handwork. Winnebago really only got started about five or six years ago with the acquisition of SunnyBrook and the flywheel is just now beginning to spin and we need to work to establish meaningful market share so that we can begin to benefit more directly from scale and some other resource leverage. So I would say that we'll establish some interim goals about moving our market share from very low-single-digits to somewhere materially higher than that. We really can't stake right now that being a market share leader in Towables is anything that will happen in the near future because of the market positions of our competitors. But we will leverage this great brand. We have to be much more competitive and introduce great products and expand our dealer channel and we are starting to see some of the fruits of that labor right now. So from another, from an acquisitive standpoint, I mentioned earlier the first thing we need to do with this company is to have some expertise and some skills around business development, and start to build some muscles about scanning the landscape and looking at what the right opportunities could be. We won't comment on what market segments or opportunities specifically would be of interest to us but I can commit to you that at least internally we'll be more active in considering non-organic growth opportunities, and then time will tell whether those turn into obviously you know visible deals or strategies that the market can see. Matthew Paige: And would you take on that to do one of those of opportunities if it required that? Michael J. Happe: I think the answer to that question is it depends. Meaning that I think the company is being very comfortable with its balance sheet for some time. There is probably different points of view on whether that's too conservative or not. So I think certainly we'll always be aware of the role of leverage in pursuing non-organic growth opportunities and but tie that directly to the opportunity as well in somewhat of sort of a pros and cons or cost benefit, risk analysis as well. So certainly aware of the cyclical nature of the industry but we also potentially don't want to miss opportunities in the market that might be very feasible for us to consider in a different way historically than what our balance sheet has looked like, so. Matthew Paige: All right. Appreciate the time and good luck for up spring. Michael J. Happe: Thank you. Operator: Our final question comes from Morris Ajzenman with Griffin Securities. Your line is open. Morris Ajzenman: Griffin Securities: Good morning, guys. Two quick follow ups and then a boarder question for Michael. The first follow up is, you talked about Class B shipments being down in the quarter and you referenced that there was a focus on quality. Will that play out into the third and fourth quarters as far as this year-over-year slowdown in delivers based on focused on quality? Sarah N. Nielsen: Well first I will may be go back to one of the points that Mike had made. On a six-month basis, there was a slightly different picture on the Bs and inside the quarter itself and there is going to be at some point a normalization after such accelerated growth in regards the market position in the retail success we've seen with that product and so there is a point in time where that flows through and plays out but to the extent that we have the opportunities to more timely ship the product that is in demand. That is first and foremost our objective to ensure that there is no disruption in getting that product our timely. So that is internally at the top of the list. But you know over the time frame going forward, it's going to be a function of you know how much more does that Class B market accelerate or grow and we've been a huge driver of that growth and what new additional products can still move that needle come out to the market that drives additional growth and then the ongoing demand of the products that's in the channel so all those will play out into the future Morris Ajzenman: Okay the next quick follow on, warranty expense please correct me on this if I was wrong on this Sarah is 1% to 1.5% of sales is a normal range and you at the high end right now? Sarah N. Nielsen: If you look in the quarter specifically that's our comp on a year-over-year basis and over the years, I would say that is then in that 1% to 1.5% maybe 1.75% range historically and that is an area that we've seen some pressure and we've worked hard to address the things that contribute to that and the tails can be a little bit longer but to the degree that we can make changes are impactful, we are working on that very diligently. Morris Ajzenman: I understand. So right now you are about 1.5% to 2% percent of sales range level? Sarah N. Nielsen: Yes. Morris Ajzenman: Okay. So incrementally your warranty spend that's minimizes about $1.5 million size and it should be, is that right? Sarah N. Nielsen: In the $1 million range. Yes. Morris Ajzenman: Okay. Last question here Michael the broader picture. I know you've only been here a couple of months but nonetheless if you look back to last 10 or 12 years, gross margins moving towards previously the range between let's call it 12% to 14% 2004, 2005, 2006. Right now you're probably averaging just about 10% or so. Assuming no acquisitions in the same of sort of portfolio of businesses, where do you think gross margins can ultimately rebound to? Michael J. Happe: Yes, I use the honeymoon period to say that I don't have a specific number for you that would be meaningful to discuss. I can say that I think there are a number of factors that can help us improve gross margin in the future. Amongst them are the work that we're doing on the strategic sourcing initiative standpoint. There is no doubt that there is significant productivity opportunities within the operations environment here I mentioned that in terms of continuous improvement processes and disciplines and intensity that needs to be added across the company. We are very aware of the mix of the products that we're making and different profitability levels by even skill level and so and we certainly hope to manage mix as the market allows us to drive a higher gross margin. And if you want to get really far ahead of things there are things you can do a new product development in terms of DFMA principles in where you're engineering designers and your NPD teams work with manufacturing more closely to lower things like labor content and less parts and a whole number of different factors and I can just tell you we'll be committed to driving gross margin higher as we can in the future and lot of work to be done to continue some momentum on that but I don't want to hazard a guess on what's potential at this early stage. But I can tell you that as I visit with our team and walk the facilities and learn about our processes, there is improvement potential in a material manner that we will chase. Morris Ajzenman: Thank you. Operator: Thank you and I will now turn the call back over Don Heidemann for closing remarks. Donald L. Heidemann: Thank you for joining us today as we've reviewed our second quarter financial results. We look forward to specking to you again when we review our third quarter results on Wednesday, June 22. Thanks again. Operator: Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect and everyone have a great day.