Winnebago Industries, Inc. (NYSE:WGO) Q2 2024 Earnings Call Transcript March 21, 2024
Winnebago Industries, Inc. beats earnings expectations. Reported EPS is $0.93, expectations were $0.9. WGO isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and thank you for standing by. Welcome to the Second Quarter Fiscal 2024 Winnebago Industries Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to turn the call over to Ray Posadas, Vice President of Investor Relations and Market Intelligence. You may begin.
Ray Posadas: Good morning, everyone, and thank you for joining us to discuss our fiscal 2024 second quarter earnings results. 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 second quarter results was issued and posted to our website earlier this morning. Please note that beginning this quarter, we will be using an earnings slide deck that follows along with our prepared remarks. You may access the deck on the Investor Relations section of our website under quarterly results. Turning to Slide 2, let me remind you that certain statements made during today’s conference call regarding Winnebago Industries and its operations may be considered forward-looking statements under securities laws.
The Company cautions you that forward looking statements involve a number of risks and are inherently uncertain, 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 we encourage you to read. In addition, on today’s call, management will refer to GAAP and non-GAAP financial measures. The reconciliation of the non-GAAP measures to the comparable GAAP measures are available in our earnings press release. Please turn to Slide 3. Joining me on today’s call are Michael Happe, the President and Chief Executive Officer of Winnebago Industries, and Bryan Hughes, our Senior Vice President and Chief Financial Officer.
Mike will begin with an overview of our performance during the quarter, Bryan will discuss our financial results and the primary drivers, Mike will share our future mid-cycle organic growth targets and underlying assumptions. Then management will be happy to take your questions. Now please turn to Slide 4 as I turn the call over to Mike.
Michael Happe: Thank you, Ray. Good morning, everyone, and thank you for joining us to discuss our second quarter fiscal 2024 financial results. I want to start by thanking the teams across our business, Winnebago, Grand Design RV, Newmar, Chris-Craft, Barletta and Lithionics. I am incredibly proud of your dedication and commitment to executing on our growth strategy and delivering exceptional outdoor experiences for our RV and Marine customers every day. Before diving deeper into our results, I would like to emphasize the three main points that we want you to take away from our call today. First, we performed in line with our expectations during the second quarter of fiscal 2024 and demonstrated resilient profitability. Second, we anticipate industry softness in fiscal Q3, particularly on the Motorhome RV and Marine side, amid continued dealer caution.
And third, as we move beyond the near term market dynamics, we remain confident in our ability to grow our business, capture market share, and substantially increase our profitability and free cash flow. This optimism is reflected in our new future mid-cycle financial targets. Now, let me expand on our fiscal Q2 results. The December through February period is typically a seasonally lighter retail quarter ahead of what historically has been a sequentially stronger spring selling season. As anticipated, dealers continued to closely manage inventory levels in Q2 in the face of a higher interest rate environment and seasonal demand trends. Despite the macroeconomic challenges, we continued to demonstrate resilient profitability and an unwavering commitment to operational discipline.
Net revenues for the second quarter were $703.6 million, reflecting the anticipated sequential and year-over-year softness in the Towable RV, Motorized RV and Marine businesses that Bryan and I referenced in our first quarter earnings call. Our consolidated adjusted EBITDA margin of 7.1% was flat on a sequential basis, even with a $59 million decrease in revenue. Overall, we delivered adjusted earnings per diluted share of $0.93. Bryan will review our financial results in more detail shortly. Our performance speaks to our diversified portfolio of premium brands as well as our investments in new products and technologies. Over the past 7.5 years, we have added four premium OEM brands to our portfolio and significantly strengthened our mobile power management offerings with the acquisition of Lithionics.
Our enterprise approach remains one of collaboration across our brands rather than competition. We are driving growth and profitability through our Centers of Excellence that further enhance what makes each of our brands great and enables powerful portfolio synergy. In this way, we provide our diverse and passionate customer base with the quality, innovation and service they have come to expect from us. Turning to Slide 5, I will comment briefly on inventories and shipment trends. As we enter the back half of 2024, the most recent data suggests that the RV industry is moving in a positive direction from an inventory standpoint, particularly on the Towable side. The RV Industry Association’s January wholesale data showed an 11% increase in total RV shipments compared with the prior year period.
Towable RV shipments were higher by 21% year-over-year in January, while Motorhome RVs were down 27%. Historically, the third and fourth quarters of our fiscal year are the destocking quarters for our RV dealers as retail accelerates through the spring and summer selling season. However, given the current macroeconomic environment, it remains to be seen whether this year’s dealer behavior follows normal seasonal patterns. At the industry level, RV shipments ended calendar year 2023 at 313,174 units, down 36.5% from the prior year. For calendar 2024, the RVIA continues to expect RV shipments to increase to a midrange estimate of 350,000 units. While we remain mindful of continued uncertainty around the timing and/or quantity of Fed rate cuts this year, based on recent trends, we believe that for the full calendar year, the RV industry will return to a 1:1 retail to wholesale replenishment ratio.
On Slide 6, Winnebago Industries saw a modest decline in RV market share. On a trailing 12-month basis through the end of January, our total market share stood at 11.4%. More recently, we’ve seen improvement in Motorhome RV, particularly Class A and Class C, which are up in the most recent three and six-month periods. Given consumer emphasis on affordability we believe our premium brands are holding up well. Turning to Slide 7. As we expected, marine orders were soft in the second quarter as dealers continued to work through elevated industry inventory levels and address the effects of higher interest costs on inventory floor plan expenses while also being mindful of inconsistent retail performance. The bright spot remains the Pontoon segment and within that, our Barletta brand, which continues to gain market share, increasing to 7.9% on a trailing 12-month basis through the end of January.
On Slide 8, in looking across the outdoor recreation markets that we serve, one of our true competitive advantages here at Winnebago Industries is what we call purposeful innovation, delivering customer-centric design and thoughtful and affordable technology to delight customers as they travel, live, work and play. Whether it is our highly differentiated house power solutions from Lithionics or Winnebago Connect, our game-changing intelligent RV platform, these and other technology investments provide us with significant runway for future profitable growth. Turning to recent highlights at the Florida RV SuperShow in January, consumers got a first-hand look at the innovative new models from Winnebago, Grand Design RV and Newmar. Our flagship Winnebago brand launched five all new RVs, including the newest generation of the popular EKKO and Revel motorhomes, both of which began shipping in Q2.
Built on Mercedes Sprinter chassis, the Class C EKKO Sprinter 23B and the new Class B Revel are designed with enhanced extended season capabilities for adventure-ready outdoor enthusiasts. We also showcased the all-new Winnebago View and Navion motorhomes equipped with Winnebago Connect. With the systems’ easy to navigate touchscreen, consumers can monitor and control all major RV systems, from lighting, climate and energy management to refrigeration, water systems, slide-outs and door locks. We also offer a subscription service that gives consumers access to a host of other benefits, such as automatic temperature control for pet monitoring and remote diagnostics. The rollout of Winnebago Connect is in its early stages but we are excited about the long-term potential of this technology.
In the Towable category, Grand Design debuted its exciting new Influence Fifth Wheel line. Influence offers spaciousness and amenities comparable to Grand Design’s industry-leading Solitude fifth wheel, yet packaged at a more affordable price point. We’re also leaning into our commitment to a more sustainable outdoors through new partnerships such as our recent alliance with Xos, a leading manufacturer of electric commercial vehicles. Our Winnebago Specialty Vehicles division is partnering with Xos to develop a fully electric chassis that will use Xos battery and electronics technology customized for Winnebago’s unique commercial applications, such as medical and dental clinics, mobile child advocacy centers and mobile command vehicles. This agreement underscores the mission of Winnebago Industries Advanced Technology Group in creating new solutions that anticipate the evolving needs of our customers.
At Winnebago Industries, our commitment to corporate responsibility is also the cornerstone for sustainable business growth and long-term profitability. So in January, we were especially honored to be named one of America’s Most Responsible Companies by Newsweek for the second consecutive year. This recognition underscores the work we have done as an organization to advance our corporate responsibility initiatives. On the Marine side, at last month’s Miami International Boat Show, Chris-Craft unveiled a special 150th anniversary edition of its iconic Launch 27, one of two new Chris-Craft products that will be introduced this year. Meanwhile, our Barletta brand is expanding its reach as the industry’s fastest-growing pontoon business. The recent SSI Data shows that Barletta continues to take market share.
The brand also continues to capture the attention of the industry. The National Marine Manufacturers Association and Boating Writers International, recently recognized Barletta with the 2024 Discover Boating Minneapolis Boat Show Innovation Award for its unique center mounted twin engine pontoon boat. This unique design shifts the engine mount from the outer tubes to the transom allowing an exponentially higher level of performance and functionality. Looking ahead, demand for the RV and boating lifestyles remain strong, creating a tailwind in the future that supports the growth of our portfolio of exceptional brands and aligns with our vision to be the trusted leader in premium outdoor recreation. We continue to focus on those areas within our control, relying on our diversified business model, flexible cost structure and balanced capital allocation strategy to continue to deliver value for our stakeholders.
With that, I will now hand the call over to Bryan Hughes.
Bryan Hughes: Thanks, Mike, and good morning everyone. As a reminder, in my prepared remarks starting on Slide 9, I will focus on the key drivers of our performance. Please refer to our earnings release and earnings supplement documents for a detailed overview of our key financial results. Our fiscal 2024 Q2 results reflect the success of our disciplined production and cost management, the strong dealer and supplier network that we have built over time, as well as the resilience of our highly variable cost structure. This cost structure is a critical advantage that provides us with production flexibility and enables us to swiftly respond to changing volume and market conditions in today’s dynamic environment. As a result, during the second quarter of fiscal 2024, we were able to partially offset the deleveraging effect of an 18.8% decrease in revenue compared to prior year to deliver 7.1% adjusted EBITDA margin and adjusted diluted EPS of $0.93.
The decrease in revenue was driven by lower unit sales due to lower shipments, given the current retail market conditions and a shift in product mix resulting in lower average selling prices. By extension, our gross profit decreased 28.3% compared to prior year, driven by the deleveraging effect of slowing sales coupled with an unfavorable shift in product mix. Although there was a small sequential decrease in our gross profit margin, our operating margin remained relatively healthy. This resilience can be attributed to a sequential reduction in SG&A expenses. It’s also important to note that our SG&A expenses as a percentage of revenue remain elevated compared to historical levels, reflecting our ongoing investments in engineering, digital asset development, and the expansion of our data and IT capabilities.
Before covering our performance by segment, I’ll highlight a few unusual items that had a financial impact on our bottom line this quarter. In January, we announced the issuance of $350 million convertible senior notes due in 2030. We used the proceeds of the offering to refinance approximately $240.7 million of convertible senior notes that had been due in 2025. Associated with this refinancing, we recorded a loss of approximately $32.7 million. It’s important to note that while this loss negatively impacted our GAAP earnings, it did not reduce our taxable income, which therefore caused our reported tax rate for the period to be elevated. Additionally, we incurred a non-recurring, non-cash fair value adjustment of $3 million related to a debt investment.
As a result, second quarter fiscal 2024 GAAP net loss was $12.7 million and GAAP loss per share was $0.43. After adjusting for these nonrecurring or nonoperating items, our adjusted earnings per diluted share was $0.93. As a reminder, fiscal Q2 is traditionally a lighter quarter for the industry as it relates to shipments. However, even with a sequential $59 million decrease in revenue, our variable cost operating model enabled us to deliver sequentially flat consolidated EBITDA margins of 7.1%. Turning to our performance by segment, starting with Towable RV on Slide 10. During our last earnings call, we noted that dealers had been reluctant to take on additional inventory given the uncertain retail environment. Dealers remain cautious heading into the spring, preferring to evaluate the spring retail selling season’s performance before committing to an increase in their inventory levels.
Due to lower unit volumes related to market conditions and a reduction in average selling price per unit related to product mix and targeted price reductions, partially offset by lower discounts and allowances, revenues for the Towable RV segment were down 16.9% year-over-year. Towable RV segment adjusted EBITDA was down 31.8% and adjusted EBITDA margin was down 210 basis points year-over-year, primarily due to deleverage and unfavorable warranty experience, which was comparing against favorable warranty experience in the prior year. These unfavorable drivers were partially offset by lower discounts and allowances. Backlog decreased compared to the prior year due to current market conditions and a cautious dealer network. Turning to Slide 11.
Revenues for the Motorhome RV segment were down 16.2% from the prior year, but up slightly sequentially as we launched several new products, including the Revel 2.5 and the EKKO on a Mercedes chassis that resonated well with customers. The year-over-year decline was driven by lower unit volumes related to market conditions, higher levels of discounts and allowances compared to prior year, and unfavorable product mix, partially offset by price increases related to higher motorized chassis costs. Segment adjusted EBITDA was down 38.9% and adjusted EBITDA margin was down 280 basis points versus the prior year due to volume deleverage, higher warranty experience, higher discounts and allowances and operational inefficiencies. Sequentially, our adjusted EBITDA margin increased 130 basis points due to improved labor productivity and cost containment efforts.
Backlog decreased from the prior year due to current market conditions and a cautious dealer network. Please turn to Slide 12. Revenues for the Marine segment were down 38.2% from the prior year as a result of a decline in unit volume related to market conditions, unfavorable product mix due to the launch of lower price point Barletta Aria, and higher levels of discounts and allowances compared to prior year. Marine segment adjusted EBITDA margin decreased 650 basis points versus the prior year. This was primarily due to volume deleverage and higher discounts and allowances, partially offset by lower incentive-based compensation related to operating performance. Backlog for the Marine segment was down from the prior year period due to a cautious dealer network.
Moving now to the balance sheet on Slide 13. As of the end of the quarter, Winnebago Industries had a net debt to EBITDA ratio of approximately 1.6 times, which is slightly above our targeted range of 0.9 to 1.5 times. Maintaining a strong balance sheet remains core to the Winnebago Industry’s investment thesis and enables us to execute on our well-balanced capital allocation strategy. As discussed, we completed this quarter a $350 million offering of convertible senior notes for refinancing the 2025 maturities. This successful refinancing underscores our strong operating performance and credit profile and provides us with financial flexibility for future growth. We continue to prioritize digital and strategic investments in our business, like the opening of the ATG, Advanced Technology Group Innovation Center, for example, or strategic acquisitions like Lithionics, while returning capital to shareholders.
During the second quarter, we paid a quarterly cash dividend of $0.31 per share. As a reminder, we increased our quarterly dividend by 15% during the first quarter, reflecting the confidence we have in our ability to profitably grow revenues, capitalize on new opportunities and gain market share in the coming years. These actions further underscore our commitment to the long term strength and trajectory of our business. Before turning the call back to Mike, let me provide some color on our expectations for the fiscal third quarter. Based on current market conditions, with softness in retail sales and dealer reluctance to carry high inventory, we anticipate Q3 consolidated net revenues to be higher sequentially, but down mid to upper single digits on a year-over-year basis.
On our Q1 call in December, we expressed the view that destocking of aged inventory on the Towable RV side was largely complete. While the Motorhome RV category still had some excess inventory remaining on dealer lots, recent reports from marine dealers suggest the marine industry also has some destocking left to do. As a result, we anticipate both the Motorhome RV and the Marine segment revenue to be roughly flat sequentially in Q3 versus Q2, as we continue to aggressively manage inventory, while Towable RV segment revenue is expected to increase modestly on a sequential basis. Profitability will continue to be challenged by the deleveraging impact of lower year-over-year sales volumes and we therefore expect consolidated margins to be down versus the prior year quarter.
We expect that consolidated Q3 profitability will reflect modest improvements sequentially from an EBITDA perspective. Now let me turn the call back to Mike to discuss our future mid cycle growth targets and provide some closing comments. Mike, back to you.
Michael Happe: Thanks, Bryan. In addition to our fiscal Q2 financial results, we also announced future mid cycle organic growth targets this morning. Please turn to Slide 14 for an overview of our targets in comparison with our trailing 12-month financials. Market assumptions underlying the financial targets include North American RV retail volume at a mid cycle fiscal year range of 425,000 to 450,000 units, and US aluminum pontoon retail volume at a mid-cycle fiscal year range of 60,000 to 63,000 units. In reviewing our updated targets, I would like to emphasize the potential for EBITDA margin expansion and free cash flow generation inherent in our business model. As we move towards the mid cycle in coming years, we expect revenue to increase by approximately 51% at the midpoint of our range compared with our fiscal Q2 trailing 12 month results.
This translates to a nearly twofold expected increase in adjusted EBITDA and a 56% increase in free cash flow, underscoring our substantial operating leverage. Additionally, we believe there is ample opportunity to broaden our market share in both the RV and the pontoon industry. While we do not anticipate a consistent expansion in basis points every year, we believe these ranges reflect achievable average annualized improvement rates. Finally, in the coming years, we plan to meaningfully expand our philanthropic giving to the communities where our employees live, work and play. We are extremely proud out of our programs that eliminate barriers, promote access and connect all people with the social, mental and physical health benefits of the outdoors.
Please turn to Slide 15. I briefly touched on the EBITDA margin expansion opportunity ahead. At the midpoint of our range, we expect our adjusted EBITDA margin to expand by 255 basis points. This is in part driven by improved operating average through our flexible high variable cost operating model, as well as expected new product margin improvements and business excellence and operational efficiency initiatives. We anticipate a substantial increase in free cash flow as illustrated on Slide 16. We expect to generate $325 million to $375 million in free cash flow, representing a 56% increase at the midpoint of our range, driven largely by higher profitability. To support our future revenue growth, we expect higher working capital requirements that will be partially offset as we realize efficiencies.
Finally, we expect both maintenance capital and growth capital to remain consistent, each of which would be around 1% of revenue, or 2% in total when taken together. Before we turn to your questions this morning, I’ll sum up on Slide 17 by highlighting the three things I want to leave you with, as well as the aspects of our business that makes us unique. First, as you heard today, we performed in line with our expectations for the second quarter, navigating the effects of ongoing softness in the RV and Marine markets. We demonstrated resilient profitability and an unwavering commitment to operational discipline that is underscored by our results. Second, we anticipate continued industry softness in fiscal Q3. Motorhome RV and Marine segment revenues are expected to be roughly flat sequentially, while Towable RV segment revenues are expected to increase modestly on a sequential basis.
Third, as we move beyond near term market dynamics, we are confident in our ability to grow our business, capture market share and increase our profitability in free cash flow. We expect to capitalize on long term secular growth trends and a number of combined elements of our business that make us unique. These include the following: we are leveraging an enterprise approach to promote collaboration across a diversified portfolio of industry leading outdoor lifestyle brands. Each of our brands brings unique attributes and operational strengths, and our functional centers of excellence bring out the best in each brand and drive strong portfolio synergy. We have a proven go-to-market business model that leverages trusted dealer relationships and strong brand equity within consumers.
Our commitment to innovation and our investment in our enterprise capabilities are enabling us to capitalize on long term secular trends despite any short term fluctuations in demand. Our flexible integrated operating model and highly variable cost structure is enabling the resiliency that has been demonstrated on our results as we navigate through the current cyclical trough. And finally, we have a healthy balance sheet and a balanced capital allocation strategy that supports future profitable growth, accretive M&A and long term shareholder returns. With that, I will turn the call back over to the operator, who will open up the line for your questions.
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