Citing specifically the performance of its Grand Design RV subsidiary and its Class B motorized product — despite significant chassis supply issues in that segment — Winnebago Industries President and CEO Michael Happe said the company has managed to “outpace the industry” during challenging times.
“This quarter is a true example of how our new enterprise approach can provide strong consolidated results, even when we incur unexpected external challenges in one of our core businesses. While we are not immune from the North American RV industry headwinds that have persisted during our fiscal year, our consolidated competitive position and the strength of our diverse set of product lines have enabled us to, once again, outpace the industry,” said Happe, who made his comments during a conference call with investors yesterday (June 19) following the release of its 3Q report.
In its Winnebago’s 3Q financial report, the company announced revenues for the fiscal third quarter, ended May 25, were $528.9 million, a decrease of 5.9% compared to $562.3 million for the year-ago period.
Revenues for the motorhome segment were $160.2 million, down 34.6% from the prior year driven by decreases in both Class C and Class A unit sales as dealers continue to lower their inventories. Meanwhile, revenues for the towable segment were $346.8 million for the third quarter, up 10.8% from the prior year, driven particularly by the strength of the Grand Design RV brand.
Happe, who was joined on the call by Winnebago Vice President and CFO Bryan Hughes and Steve Stuber, the company’s director of financial planning and analysis, also used the opportunity to announce production expansion projects at both Grand Design in Middlebury, Ind., as well as Florida-based Chris-Craft, a recreational boat builder that Winnebago acquired in June of last year in its pursuit to become a “more diversified outdoor lifestyle company.”
Other highlights of the conference call with investors are as follows:
• On the retail climate, especially in the northern region where weather has been a hindrance:
Happe: Certainly, I think summer has begun in the northern parts of the country. There has been quite a bit of rain and moisture in certain places. But I think we generally feel better about the summer selling season here in the last several weeks. The best way I would describe it is the variability of the retail has settled down, and it has been performing on a more consistent basis going forward.
Like many of you in the industry, we don’t get to see the formal data for a while. But the spring was particularly tough. We don’t use that as an excuse. We didn’t even attempt to quantify it on this morning’s call. But if you talk to dealers and end customers, all of them will generally say that in most parts of the country, it wasn’t the greatest of springs and summer has gotten off to a little bit later start.
As you know, we’re a very seasonally retail-driven business. It’s important that we see good retail here over the next several months so that the dealers, as they go into the Open House event in the RV industry in September, are in a good position to consider a good reorder position at that particular event.
• About the company’s backlog compared to pace of incoming orders:
Happe: At the end of the day, retail performance is, for us, the ultimate market metric. and we feel confident that as long as certain parts of our business — very specifically, as examples, Grand Design RV and our Winnebago-branded Class B Motorized segment — as long as consumers continue to choose our brands in those categories more than other brands that the orders will follow.
During the run-up this past decade in RV wholesale shipments, you saw many dealers putting orders in over an extended period of time; they were ordering products, three months out, six months out, potentially even farther. Certainly, with the capacity that’s been freed up in the industry due to the market slowdown, the dealers are much more comfortable giving the OEMs their orders in a much shorter time period.
And whether we call those stocking orders or retail replenishment orders, it’s sometimes difficult now to differentiate because they’re coming in with relatively short lead notices in terms of when the dealers now want them.
• On the expansion plans at Grand Design, and whether that might include new product:
Happe: The expansion at Grand Design is a carefully considered effort to stay up with the projected growth of that business.
And while, at certain times during the current fiscal year we have appropriately throttled back the production rates on several of the lines in the existing Grand Design facilities — including the two plant expansions that came online in calendar 2018 — our projections related to the growth of their existing towables business really calls for us to have to consider more expansion there.
Now, we recognize that highlighting a capacity expansion project in the midst of the current RV conditions when some of our competitors are certainly talking about managing their capacity back may seem at odds with what’s happening. But, it is reflective of the momentum that that particular brand has.
But it’s also our belief that our talented team can do what they say they will do, and that is continue to deliver great products for our dealers and end customers, resulting in more lot share and more retail growth. Believe me, those types of decisions during these times don’t come without a lot of deliberation and angst. And we always reserve the right to manage the pace of construction and other factors should the market take a hard turn in a negative direction.
And the same thing applies to our Chris-Craft business in terms of their prospects going forward. I would tell you both of those businesses have a healthy list of new products and ways to grow on the market from a product expansion standpoint that are not public yet and those are certainly underpinning some of the projected volume that you’ll see running through those facilities.
• On whether the ongoing saga of the Roadtrek brand has impacted the company’s performance in the Class B market:
Happe: That continues to be an opportunity for us. It certainly has challenged many of the dealers that have carried the Roadtrek or Hymer brands in North America, and sent them looking for alternate solutions.
In most cases, we have existing dealers already in those markets. So for our existing dealers, it’s an opportunity for us to continue to put good Winnebago-branded product in front of them to potentially take advantage of this opportunity and steal that market share from the Roadtrek and Hymer brands.
I think we’ve done that. If you’ve looked at the retail market share results that have come out recently from Statistical Surveys — and, as we all know, those are not always complete the moment that they’re released; there’s a little ebb and flow as they settle — but I believe in the last retail report on Class B’s, we took somewhere in the neighborhood of five more points in market share in that category in that time period. So we are taking share there.
We are really just trying to play our game and ramp it up even further, and in no way, shape or form saying anything negative about Roadtrek or Hymer. It’s more about what Winnebago has available. And as Roadtrek has a new parent coming into this market that tries to stabilize that business, we anticipate that competition from them and other RV manufacturers will elevate and we have to be very, very committed.
That’s why this supply chain disruption in our third quarter was especially disappointing, because you can make the argument that our retail share gains could have been even higher in our third quarter, and/or in the coming months, had we been able to deliver some of the product that we had hoped to deliver. So the timing of that is particularly unfortunate for us.
• On whether tariffs are having an impact on retail pricing:
Happe: That is the million dollar question not just for Winnebago Industries, but for probably all other durable goods manufacturers and other industries that are impacted by potential rising costs and materials due to tariffs. We have always taken a stance here at Winnebago, at least in the last three years, to try to price to the market as opposed to price to cost.
Now, that’s easy to say, but you’re certainly cognizant of your costs, as you devise your pricing strategies. I am concerned that we have reached some of the outer limits of pricing elasticity in terms of asking for a premium over some of our competitive brands, so our potential to price is probably more limited today than it was two years ago.
I also think the broader concern — and I do think it’s had an impact on retail results to-date in the industry and especially in calendar ’19 — is that it just generally raises the price of RVs overall to the end customer. Every $10, every $100, every $1,000 that a product goes up in price in the market, it does have an impact.
And, while there have been a lot of comments generally about inflation not being an issue in the broader U.S. economy yet, I personally am not sure that that’s the case in the RV industry. I do think some of the product pricing and inflation has had an impact on slowing retail here in the last year, and I think all of the RV manufacturers are going to be very intentional with how they price going forward in light of this.
• On where Winnebago stands with regard to dealers rebalancing their inventory levels:
Happe: We have maintained all along that we’ve been in a better position than most of our competitors. Our inventory position, on a consolidated company basis, has continued to fall quarter-over-quarter, in terms of comparisons versus a year ago. In the Winnebago-branded businesses especially, our inventory is lower than a year ago. In the Grand Design business, it still remains higher than a year ago, but that’s because of the incredible retail success that brand continues to have.
The biggest thing that we paid attention to today is the aging inventory. We have a number of programs in place, particularly on the Winnebago side, to make sure that the aging inventory that we do see in the dealer channels are addressed.
I’m pleased to report on the Grand Design side that aging inventory, while a little elevated from a year ago, is probably significantly lower than most of the rest of the industry. So, we’re watching both, but it’s a position that we still feel comfortable with at this time.
• On how current promotional activity might improve retail performance:
Happe: The promotional activity in the RV market continues to be very present, albeit we have noticed a little bit of a change here as we enter the summer months. I think the promotional activity is becoming more targeted at retail, specifically around some of the aging products. We have seen a slight deceleration on some of the pushing of product into the market as some of our larger competitors have seen their inventories normalize not only in their lots, but also on their dealers’ lots.
So the promotional activity you’re seeing now is starting to trend towards products that are stuck in either an OEM or on a dealer lot, and you’re seeing a lot more product specific spiffs for dealer salespeople against aging inventory — or a particular OEM may have overbuilt a little bit on a particular brand or floorplan or model, and you’re seeing a push to get that specific product out.
I think the industry is generally going to ride out the summer months on the recreational vehicle side. Hopefully, retail continues to slightly improve through the summer months. At retail, the levels of inventory in the field continue to work their way down. And I think we’re really gearing up for a quite interesting and potentially strong Open House in September as dealers wait for that next industry event to potentially bring a lot of stocking orders back to the market or back to the OEMs.