Good morning, ladies and gentlemen, and welcome to the Third Quarter 2012 Winnebago Industries Earnings Conference Call. My name is Chris, and I will be your conference moderator for today. [Operator Instructions] And at this time, I would now like to turn the conference over to your presenter for today, Ms. Sheila Davis, Public Relations and Investor Relations Manager. Ma'am, you may proceed.

Thank you, Chris. Good morning, and welcome to Winnebago Industries' conference call to review the company's results for the third quarter of fiscal 2012 ended May 26, 2012. Conducting the call today are Randy Potts, Chairman of the Board, Chief Executive Officer and President; and Sarah Nielsen, Vice President, Chief Financial Officer. I trust each of you received a copy of the news release with our earnings results this morning. This call is being broadcast live on our website at winnebagoind.com. A replay of the call will be available on our website at approximately 12:00 noon Central Time today. If you have any questions about accessing any of this information, please call our Investor Relations department at (641) 585-6803 following the conference call. Before we start, it's my duty to inform you this presentation may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements are inherently uncertain. A number of factors could cause actual results to differ materially from these statements. These factors are identified in our filings with the Securities and Exchange Commission over the last 12 months, copies of which are available from the SEC or from the company upon request. I'll now turn the call over to Randy Potts. Randy?

Thanks, Sheila. Welcome, everybody, to our conference call. We're pleased with the third quarter was stronger for us than the past few quarters. Sarah will get into the details of the financials in a minute; but first, I'll make a few overall comments. As we stated in our conference call last quarter, we began the new model year in a much better position than prior years, basically, sold out of last year's model products. In May, we hosted our Dealer Days event. The key message in our Dealer Days presentation was that we are no longer in survival mode. My direction is to be a change agent for the company. Winnebago Industries is moving in a positive direction. Our new 2013 lineup is just a start on how our products and processes are evolving. We'll continue to improve our research and design process, be more nimble and responsive and better in tune with the nuances of the marketplace. A great example of this dynamic is the new value-priced Winnebago Vista and Itasca Sunstar 26HE, Class A gas models we introduced at the show. We redefined our typical design development and prototype processes to fast track results, and our dealers have overwhelmingly approved. We've seen tremendous growth in our Class A diesel market share, and we plan to improve in that position with the redesigned Winnebago Journey and Itasca Meridian Class A diesel lines and our luxurious new Winnebago Tour and Itasca Ellipse 42GD Class A diesel that's complete with a 55-inch LCD television. On the Towable side, we also introduced some great new products, including the value priced Sunnybrook Remington line of travel trailers and fifth wheels as well as the unique new retro-looking Winnebago Minnie line of travel trailers. This was the first Dealer Days event we've had for 4 years and the first time we've had shown Towable products at one of these events. The event resulted in improved sales order position for our motorized products and had a particularly positive impact on our Towable backlog. In the second quarter conference call, we had reported that the Towables subsidiary was profitable for the month of March. Now, we're pleased to report that they've experienced their first full quarter of operating profitability. We're pleased with the progress we're seeing there with the increased revenues and earnings and continued market share growth. We believe we have a great opportunity to grow that market over time, particularly, with the strength of our Winnebago brand name. Based on the positive response we've received to our new model year products, our sales order backlog has shown tremendous growth. As a result, we've taken steps to gradually increase production rates throughout the coming weeks. Due to the improved backlog and continued low dealer inventories of fresh new products, we're optimistic about the remainder of the fiscal year. With that, I'll turn it over to Sarah for the financial review.

Thanks, Randy. I will now review the financial performance of the company for the third quarter of fiscal 2012. Net revenues for the third quarter were $155.7 million, a 14.9% increase from the third quarter of fiscal 2011. The net increase in revenue was driven by 2 primary factors: increased Towable sales volume and higher average selling prices based upon the mix of RVs delivered. Our motor home average selling price was up approximately 7.5% and the Towable average selling price increased 16.2%. The incremental revenue generated in our fiscal third quarter allowed us to improve our gross margin by 140 basis points on a year-over-year basis and 260 basis points on a consecutive quarter basis. A key factor for the margin improvement relates to better fixed cost absorption as we produced more product in the quarter. Towables specifically contributed to improved results in the third quarter, generating operating income that resulted in $0.01 of EPS for the fiscal quarter, the first accretive quarter since the acquisition. This compares to a $0.01 loss in the same quarter last year. The investments we have made over the past several quarters are beginning to produce positive financial results in the near term, and we expect to build on that momentum. The increased Towable backlog, coupled with the strong retail return rate and relatively low dealer inventory we are experiencing in this segment, validates our beliefs that there is room to grow this portion of our business in the coming quarters and years. As Randy mentioned, we held our Dealer Days event inside the fiscal third quarter, which was the primary reason our selling expenses increased from the prior year. Our cash balance remains flat at approximately $80 million at the end of the third quarter. During the quarter, we invested an incremental…

[Operator Instructions] And our first question comes from the line of Kathryn Thompson.

You had some nice improvement in gross margins from the last quarter to this quarter. How much of the improvement was driven by volume or lower raw materials or lower discounting? Just roughly in these 3 buckets, what were -- how did it really split up in terms of the overall improvement in gross margins?

Kathryn, when you look at the gross profit, the key point, and I briefly touched upon it, was notably with our fixed cost absorption because we were producing more in light of our increased demand that's evident in the backlog. That most notably derived more margin impact from a discounting perspective at the revenue line. It's very much equal and not a factor in any improvement either on a year-over-year basis or on a quarter basis. From an ASP perspective, that also helps to some degree, and we also did receive some benefit from an efficiency perspective on the labor side. But most notably, it is in the fixed cost absorption.

So discounting really -- lower discounting didn't necessarily help margins?

That wasn't the factor for us in this third quarter comparing year-over-year or sequentially.

Maybe you can give an update on discounting trends?

Discounting trends, we definitely -- it has a seasonality in the third quarter associated with any rental volume and that is similar to what we typically see in our third quarter on a year-over-year basis. From a standpoint of demand and interest, and Randy touched upon them, new model year product, the interest is evident and very high in light of where our backlog order position is at. So I don't have any -- I guess, any specific examples of...

The backlogs aren't necessarily driven by discounts, maybe?

No, I don't have that perspective.

I understand you had Dealer Days and that contributed to outsized backlogs. If you could -- to the best of your ability, if you were to peel back Dealer Days or maybe separate what's driving the outsized backlogs? In other words, you had a 90-plus-percent increase in backlogs, you didn't have Dealer Days, it would've been up like 30%? Maybe you could help us understand how to think about that backlog number on a more normalized basis, understanding that we really haven't had normal in 5 -- 4 or 5 years?

Kathryn, Dealer Days, we had a very strong order position in motorized going into Dealer Days. So Dealer Days, I guess, from a historical perspective, wasn't -- we didn't expect that to be in the same scale of an order-taking event that it historically was. I think the change in the business climate has just -- really has dealers ordering when they need product and not necessarily waiting for events like that. So it was a great event. It was a good opportunity to build relationships with our dealers, but it is the business, the ongoing strength of our product line that is driving the backlog not specifically that event.

And finally, any comment on the North Street Capital bid?

No change to report there.

The next question comes from the line of Scott Stember with Sidoti & Company.

Do you have -- I mean -- sorry, do you have the breakout of ASPs by category?

Yes, Scott. This is Sarah. I do have that. I'm going to give you a comparison on a quarter -- year-over-year quarterly basis. So when you look on the overall motorized side of business that I mentioned in my prepared remarks, we're up 7.5%. In the gas category, we saw our ASPs move up about 2.3%. Our ASPs in this quarter were 93,611 versus 91,521. From a Class A diesel standpoint, it was more notable. We were up 6% year-over-year. The ASPs for the quarter was 197,514 as compared to 186,283. So total Class A, as combined, was up 6.6%. The average ASP in the quarter was 130,283 versus 122,255. From a Class A perspective, we were up 3.1%, 70,008 versus 67,925. And then from a Class B perspective, we were up 6.3%, Class B for the quarter was 76,204 versus 71,674. And that all averages to an ASP for the quarter of 101,650 as compared to 94,563. Just so I don't forget, because last quarter I stopped at motorized, on the Towable side I also wanted to give you the breakout there. I mentioned they're up 16.2%. Our average Towable ASP for the quarter was 25,122 versus 21,614. We do break those out into travel trailer and fifth wheel. Our travel trailer was up most notably 14.7% at 21,051 versus 18,361 and fifth wheel was 30,150 versus 29,640, which was up 1.7%.

Maybe you guys could talk about the Towable segment? You had tremendous growth in your backlog and shipments over a year ago. Can you maybe talk about, as far as your dealer network, how much -- is there any channel still going on essentially filling these dealers with new product? And just maybe you could give us some better sense at retail what you're seeing?

Absolutely, there's channel fill. I mean, that was -- one of our initial opportunities is growing the dealer base. There really was no dealer base for Winnebago Towables as there were no Winnebago Towables. So that's been a substantial part of the business. And then as new products are developed, as we said this Remington line that we introduced at Dealer Days and the Winnebago Minnie line, that creates additional business and there's just a lot more of those kinds of opportunities in the Towable market being as big as that market is for new products to come out of that facility. And as far as retail, I think about all I could really offer there is that we think we're getting good pull-through of the products that are going to the dealers. It isn't strictly a channel fill scenario. Naturally, the product has to be pulled through the retail level, and I think we're satisfied that that's occurring.

And can you maybe touch on the discounting that you're seeing on the Towable side?

So we have an advantage you could maybe argue because so much of what we're doing is new and that creates a demand that helps negate discounting pressure. So it's not a significant factor for us yet at this point.

And could you maybe talk about this year with Towables, will you have a more pronounced presence at the open house event?

Yes, we're formulating that strategy, as we speak. We do plan to have a larger presence, but I would expect it to be in the scale of the operation we have.

And last question, what was the capacity utilization this year, in this quarter?

In motorized, it's about 45%.

The next question comes from line of David Whiston with MorningStar.

On capacity utilization, do you happen to have the utilization for fiscal Q2?

I believe we are at the low 40s in Q2.

And any update on the breakeven range on motor homes depending on the mix?

No, no update there. As we discussed in the previous question, the level of production that we had inside of our most recent quarter, really, it was helpful from a standpoint of fixed cost absorption and that's flowing through into our gross profit. But -- so we've definitely had a 2-year timeframe where it's tenuous on a quarter-by-quarter basis in regards to being very close in line and not too far above where that breakeven is, but that can vary depending on the level of incentives at the top line and the mix of the products that we're building. So no, no -- I guess, no significant update on that front.

And my last question is on the public information that came out that with the private equity bid. It sounds like their goal was to use -- to get assembly and for the Chinese OEMs utilize more of your capacity. My question is if the Board decides to go that route in terms of the capacity utilization, do you really need to go private to do that as opposed to just forming the relationships with these automakers yourselves?

No, you would not have to go private to do that.

Would it be your preference to go private to do that, though?

Well, that would depend on a multitude of factors. I don't think one would -- should assume that the facilities we have here are necessarily suitable for building automobiles. I mean, that's a pretty gross assumption in and of itself.

The next question comes from the line of Morris Ajzenman with Griffin Securities.

Following up on that -- no, not necessarily going private but the capacity utilization, 45% this current quarter, you reported decent profitability. Though, still, you want to drive margins higher, how do we get higher utilization capacity? The top line -- the industry overall hopefully, that's starts growing but even though your unit volume [ph]-- you had a mix change that really helped profitability but total unit volume is really not -- kind of going sideways. Hopefully that changes in the next year or 2. But during the interim, how do we drive capacity utilization? I mean, you can shutdown capacity, you can switch more to the travel trailer, how do we drive increased throughput or better utilization and sort of thought process that you can kind of share with us on how that plays out?

I think the first thing you need to understand is how we estimate capacity utilization. We've changed a lot of things in this operation over the last 4 years, and we historically have used the final assembly operation as our capacity driver. I don't want you to assume that when we say we're at 45% capacity that, that means every piece of our facility is at 45% capacity. We actually have many pieces of our business that are at full capacity. And to fully use the remaining 65% of our assembly capacity will actually require us to outsource certain components. So it's not -- when we talk about that excess capacity, we can't think of it in such a way that there is 65% too much factory here at Winnebago. That might be true in some areas, but it's certainly not true across the board. So really, to use that extra capacity and final assembly means hiring more people. And, yes, Sarah just corrected me that I said 65% excess, it's really 55%. I did my math wrong. But in the final assembly operation, to utilize that capacity really means it's hiring more people and speeding up the final assembly process.

Just kind of a follow-up. Hypothetical, without you revealing any costs [ph]-- but we move on to the peak of the cycle, 2, 3, 4 years down the road, whatever that might be. Now, what capacity -- sort of capacity utilization would you be operating at optimum times?

Well, naturally, we'd like to get our assembly operation to a full capacity on a single shift. We look at that on a single-shift basis, and we'd be in that something north of 10,000 units.

We definitely have the ability in our Forest City campus, along with some of the adjacent work that we do in Charles City, in Iowa, to produce motor homes in that range of 10,000 to 12,000. There would be a lot of things to -- challenges to work out -- to accomplish that would be welcome challenges. Labor, as Randy touched upon most notably, is a key element of allowing us to accomplish those much, much higher levels. But we have the ability to do that assuming that we can have the right people employed.

Again, our capacity is driven on our final assembly capacity. That's what we've always viewed as our bottleneck, thinking that we can outsource the components as we grow where needed. For instance, we used to have an entire fiberglass fabrication facility. And about 3 years ago, we decided that, that didn't make sense in the smaller market. We closed that facility, and we brought in some of the parts that weren't very well outsourced. We brought those into Forest City for manufacture and now, we -- and outsourced the rest, essentially what we used to make for ourselves. So we're currently running that fiberglass manufacturing area, which is now in Forest City, at about 100% capacity. And we'll have to outsource more as we assemble more product. And that's the model that we've built. We've changed a lot of our vertical integration that way and continue to.

One last question, unrelated. As free cash flow continues to improve -- and again, that's a presumption on my part, can you list first, second, third, fourth applications of the free cash flow? Was there -- in any manner that you think is the most important to least important?

Well, I'm hesitant to prioritize it. I will say that we continue to evaluate the best uses of cash. Reinvesting in our business, diversifications and acquisitions, stock buybacks, cash dividends are all possible opportunities and all high on our list. So we'll be having a Board meeting next week. And naturally, this, as it deserves to, will be getting a lot of discussion and should get some direction.

The next question comes from the line of Craig Kennison with Robert W. Baird.

I think you made an earlier comment about potentially spending on capital reinvestment in the business to improve some efficiencies. But in the context of 45% capacity utilization -- I'm, I guess, a little bit surprised that you want to put more money into the capital of the business. Maybe just talk about what kind of efficiencies you might be able to get that would justify that sort of spend?

Yes, we've got some pieces of our business that -- just pieces of our factory, I should say, that require -- that would benefit from updating. Again, that 45%, Craig, is really driven on the assembly piece of our business, which is not very capital-intensive. The capital would be more geared towards greater efficiencies in, say, paint systems; those types of opportunities.

And then -- that's helpful. Randy, can you give -- or maybe frame the return on capital you would expect from a project like that versus, let's say, rewarding shareholders with some sort of buyback?

Well, hopefully, we have both in our target, Craig. I don't want to say that it has to come down to one or the other.

And then maybe with respect to the backlog, to what extent are you able to ascertain what the margin is of that backlog? And in other words, you sold the product, you know what your margin should be, are you able to kind of give us a feel for how strong the margin is in that backlog relative to what you just experienced in this quarter?

Yes, we have the visibility once the order is in our system to look at the characteristic of selling that unit and do our own financial modeling. So to the degree that we have a longer visibility and then it shifted into the forecasting side as to lay out what we think will happen beyond the backlog itself. So we definitely do have that. As I touched upon in some of the other questions, by us, producing at a higher rate, that is where we're seeing the most significant flow-through at the margin because that's allowing us to reduce that level or that percentage of fixed to the overall revenue stream. So when you look at that third quarter percentage of our fixed cost, that's now under 7%, where a year ago that was nearly 9%. It was a very challenging quarter a year ago. So the fixed piece of it is one that, as our volumes pick up, we're seeing that really trends, like, from a margin standpoint. But that aside and if we would assume a more consistent run rate, that is going to come down to the mix of what we're selling and what the variable contribution margin is on each one of those units. So we're focused and very keyed in on continuing the gross profit improvement and it's a constant topic of discussion in regards to the strategy of developing new products and at what level of profitability would this provide because that's where we need and that's where we think we have a very significant opportunity, on a perspective basis, to improve those margins.

And, Sarah, for you, the Dealer Days expense, can I assume that hit in May in the income statement?

Yes, yes, it was all incorporated into our third quarter. It's in approximately $600,000 range so...

And then, Randy, investors are very curious about demand trends this spring. It seems as though in some markets, the strong start to spring seemed to peter off in April, May and June. Could you just give us your sense of how retail trends have been especially in May and June?

Well, our retails are strong. The stat surveys for April just came out yesterday, and I know you're asking about May and June, but April was a very good month for us. And I think it's fair to speculate that there's not a dramatic pull back of any type.

And lastly, Randy or Sarah, do you have any data on the used motor home market, especially used motor home prices and to what extent those prices have been falling or rising in the marketplace?

All we get is anecdotal, Craig. And with that said -- and Sarah can speak for herself, but my opinion is that the used market is strong and some dealers do very well with it. And they're looking hard for used product for their lots.

The next question comes from the line of Andrew Winnick with Winick & Associates.

I'm just wondering, can you give us a sense of any regional differences in business and particularly in the Towables? Is there 1 regions -- 1 or 2 particular regions that are much stronger in the country?

Well, I can't speak to the Towables real well, Andrew, just because kind of going back to the question I answered before about the channel fill and just the very rapid growth rate we're experiencing there, I don't think we have a stable enough footprint yet to really draw any conclusions. For us, it's been really just constant expansion of that business. On the motorized side, it think it's fair to say we continue to see challenges on the West Coast and we've been saying that for several quarters now, and that continues to be a challenge, the economy on the West Coast.

Our next question comes from the line of Richard Keim with Kensington Partners.

Most of my questions have been answered. But listening to your comments on capacity and utilization, et cetera -- and you brought some in and farmed some out, if you look at the -- historically this will be a -- one of your big volume years of over $1 billion, is it fair to assume that you're never going to get those type of gross profits anymore?

I wouldn't want to lead you to assume anything. It's -- it all completely depends on what the economy does in the future and what this market we're in looks like.

Well, forget about the economy, let's say you're able to do a $1 billion. If you go back to -- oh, go back to '04, I think you've earned -- you had gross profit of something like $160 million. If you had that type of volume -- if you had a $1 billion in volume today and talking about what you farmed out, talking about that you had 45% capacity and to increase your capacity, you have to add people, et cetera. Can you say that you -- that under those type of circumstances, you could have -- you could achieve these old gross profit margins?

Hi, this is Sarah. When you look back, especially prior to the recession, and you picked an interesting year for 2004. On that juncture, we were seeing gross profits well over 14%. That was at the peak of the market where there was very little incentives happening at the top line because there was such high demand. And the mix of the products that were being sold were -- they were -- for our company, specifically, had some very high variable contribution margins. And so, really, all the stars aligned. If you look at it, maybe a trend when our gross profits were, over a longer timeframe, not so focused in on that one particular year, our gross profit margins have more so fallen in that 12.5% range. And the question in regards to what can we do in the future, I think, is very much a function, first and foremost, as to the level of incentives. That is a different landscape today than where we were prior to 2008. And so that's important. And then also as important is that the categories of the products that have been more popular at this point in time, they are the smaller priced products in the Class C and the Class A gas. And for us, that has generally meant a slightly lower contribution margin so...

But that's today's business.

So it is a function of what landscape, how you look at a $1 billion to be in the future.

It's a different market in a different economic environment. That's why I started my reply that way because a lot of things would be different in that environment and they would reflect on our business and the market in general, the customer, the demand.

Just -- if you could just dig down a little deeper on your discounting in motor homes. I'm not really sure from what you've replied what type of discounting is going on. And I know you've partially answered that, but could you go in a little deeper on discounting?

Well, I guess, maybe simply to look at it prior to recession, we were at a very different level and it's not returned to that to that level at this juncture. And it's probably about double of what used to be the norm prior to the recession on a percentage of revenues, percentage of net revenues basis and that's probably as far as I go with...

Wait a minute, you're saying that discounting of motor homes is double of what it was?

When you look at it on a percentage of revenues, yes. We are on a percentage basis. It's at double of where it has been in the past.

So make it easy for me. What would you say the average discount on motor homes are today on Winnebagos?

Well, it can vary on any particular units and...

Yes, that's why I'm asking the average.

I mean, I'll characterize it this way. Just using a theoretic example, prior to the recession, if you assume that discount used to trends in the very low-single digits under 2% as a percentage of net revenues. So now, they're in the 4% range as an example of what I'm trying to illustrate.

Our next question comes from the line of Kevin Ryan with Bowman & Associates.

You might have mentioned this already in the call and I probably missed it, but what's the operating profit margin on the Towables business in the quarter?

From a dollar standpoint?

Percentage standpoint. And if you have a dollar standpoint, that's fine as well.

Well, the one I had characterized in my opening remarks was that we generated approximately $0.01 of earnings from the Towables division in the quarter. From an operating income standpoint, that quantifies to approximately $355,000.

For the quarter?

For the quarter.

[Operator Instructions] Our next question comes from the line of Craig Kennison with Robert W. Baird.

I just wanted to try to reconcile the SSI data that we have quarter-to-date and then the numbers that you've reported. Just to get a feel for what happened in May, if I look at SSI data for Winnebago, it appears that your sales for the first 2 months of the quarter were up something like 8%, so a very good trend but it's, of course, only the first 2 months of the quarter. If I look at the data you report and impute your retail from that, it looks closer to flat. So the way we get from a plus-8% 2 months into the quarter to flat, would imply that May was negative. But Randy, I didn't hear you say that, and I know that SSI data sometimes doesn't totally jive with your data. I just want to make sure I'm not mistaking anything.

Well, maybe I can -- and when we file our Q, we always give this key metrics table that lays out exactly retail registrations for us specifically. Inside the quarter, on the motorized side, our retail registrations were 1,414 and that compared to the third quarter a year ago of 1,394. So it was, in the quarter, up about 1.4%, so fairly flat. But this is going to consider all the Canadian AB&C [ph] and all the U.S. So it is a little bit challenging when you're using SSI data because they're not necessarily going to coincide with our fiscal month. And from a standpoint of when things are reported, there is sometimes a lag [ph] as well but...

And you're cooking it down to some very specific things, Craig. And I was really trying to comment more just to the general nature of how the summer is starting when I said I haven't seen any dramatic shifts.

We have no further questions at this time. I would now like to turn the call back over to Mr. Randy Potts for any closing remarks.

Well, thank you, everybody, once again for joining us. We believe we're seeing some positive signs in the marketplace as you can tell by our remarks. Dealer inventory continues to be conservative, and the inventory on the dealer's lots is fresh and new. The RV market continues to recover. Again, thanks, everyone, for joining Winnebago Industries' conference call today. I look forward to talking with you again on October 11, when we report our results for the fourth quarter and fiscal 2012.

Ladies and gentlemen, that concludes today's conference. Thank you so much for your participation. You may now disconnect. Have a great day.