Good day, ladies and gentlemen, and welcome to the Winnebago First 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, Scott Folkers, Vice President, General Counsel and Secretary. Please go ahead.

Thank you. Good morning, and welcome to Winnebago Industries’ conference call to review the company’s results for the fiscal 2016 first quarter, which ended on November 28, 2015. Conducting the call today is Sarah Nielson, 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 first 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 following today’s conference call. Certain statements made during today’s conference call regarding Winnebago Industries and its operations may be considered forward-looking statements under the securities laws and involve a number of risks and uncertainties. As a result, the company cautions you that forward-looking statements are inherently uncertain and a number of factors many of which are beyond the company’s control could cause actual results to differ materially from these statements. These factors are identified in our 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. Over the past few months, the search committee of the Board of Directors with the assistance of leading national talent search firm has been intently focused on identifying Winnebago’s next CEO. Finding our next CEO has been their top priority and continues to be their top priority, and assumes we’re able to we will share news on their progress. With that, I’ll turn the call over to Sarah Nielsen. Sarah?

Thanks, Scott. During the first quarter, we achieved gross profit growth with gross margin improving 90 basis points to the highest quarterly level in the past two years, despite our continued navigation through labor-related inefficiencies. Notwithstanding this improvement, net income declined as a result of lower revenues coupled with higher G&A expenses, due largely to incremental costs related to spending on our ongoing ERP implementation program. We are encouraged by the continued robust consumer demand environment for our products, as both our motorized and towable retail registrations increased 12% on a rolling 12-month basis. Demand from our dealer and rental customers are also strong, as evidenced by bookings growth of over 23% for both motorized and towables on a rolling 12-month basis. We are pleased to announce, we have received another annual rental order from Apollo, which is included in our backlog figure. Motorized dealer inventory at the end of the first quarter of fiscal 2016 was down 2% on a year-over-year basis, while up 1% on a sequential basis. These minor fluctuations relate to our commentary last quarter regarding our belief that we may be at equilibrium between wholesale shipments and retail sales. Further, we remain comfortable with the level of our dealer inventory based on the retail turn rate, which at the end of the first quarter was 2.2 turns. Prior to going into specifics regarding our results, I’ll provide an update on some recent developments related to steps we’ve taken to work towards alleviating labor constraints within motorized. As we announced last quarter, we sold the assets of our bus operations and are working to exit our aluminum extrusion operation. Revenues related to this area in our first quarter were down 25%, as our customers started to find other extrusion partners to work with. We’ve effectively stopped…

Thank you. [Operator Instructions] Our first question comes from Craig Kennison from Baird. Your line is open.

Yes, good morning. Thank you for taking my questions. I really wanted to focus on the West Coast expansion, maybe start, Sarah, with any information you can share on the cost side. How should we think about the additional cost of that facility over the next several quarters?

Well, certainly, I – when we look at the investments in this new expansion, we have shared that we believe we will be investing $15 million to $20 million in aggregate, the majority of which would be capitalized. A lot of that will start flowing through from a cash flow perspective in the second quarter of fiscal 2016. But the spending to complete some of the modifications of the building and all the equipments associated with that may flow into future quarters. From the standpoint of expense associated with that, there will be ongoing startup expenses. We believe that in the 18 months, if we look at kind of the beginning to when we would like to be completely up and running full force. There’s a possibility that we’ll have $1 million to $2 million of expenses associated with starting up these operations. We’re pretty, pretty new into the process, we have on-site presence. A key general manager is now on-site, and we’re actively hiring people. And so, we’ll update every quarter on the progress and where we’re at and highlights the specific expenses associated with this notably before we have any associated revenue with the product that we want to produce and ship from that location.

Thanks. And then on the capacity side or revenue side, how much additional capacity will this create and maybe even from a unit perspective?

All right. The way that we’re looking at this, maybe to kind of set the stage, this past year we delivered about 1,100 diesel products. On some of the smaller diesel products we’re still going to be manufacturing in Forest City. So it’s the large product that we’re going to be moving out there. And we believe that the Oregon facility will be able to handle that, let’s say the annual run rate in the next year when we’re up and going is in that 500 unit range, that’s what we’re planning towards. Basically just shifting the business from here to there, there’s additional capacity to build more. But we’re still working out the layout of the building and planning as best we can to maximize. That in our view would allow us the ability to produce an incremental 750 to 1,000 units here at this factory, because we’re going to be shifting on those resources into units that takes fewer labor hours, but big picture that’s what we think that can free up for us here.

And can you cover the timing of when you would expect to ramp up to that 500 unit run rate in the 750 to 1,000 in Forest City?

We hope that we’re entirely transitioned by the summer of 2017. So there’s going to be a ramp in that whole timeframe a little over a year from now. And if we can accelerate that, we will and we’ll share that. But the first stage on this coming winter and spring is, we’re going to be piloting the products out there, getting the people trained and going, the modifications are a huge part of the process too from a building perspective. And then as I mentioned, this is also now a part of our whole ERP implementation. And so, we’re going to be going live with our new AX functionality here this summer. And so that’s actually going to be our first motorized go-live for true production and sales, and that’s currently the thought process from a timing perspective.

So just to be clear the – by the summer of 2017, you would expect to be at about a 500 unit run rate, and at a 750 to 1,000 run rate at your other facility?

That’s fair.

And so just back into that, when would you begin this – begin the ramp? In other words, when would you produce your first couple of units in each location?

Well, as I mentioned, we’re going to start piloting. So it is going to be starting inside of our second and third quarter here. We’re hoping that by the summer of 2016, we can be doing a number of units on a daily basis, or on a weekly basis there. And so, there will be a ramp. And so let’s say in the fourth quarter of 2016 on a small amount and then we’re going to be building that up in Q1, two, and then finally by third quarter of 2017 at that true run rate where we would be like to be.

Thanks. And then just the final question is sort of, you’re adding capacity. Your retail was up 3%, you feel like inventory is going to be one-to-one. What gives you the confidence that there’s actually demand for the additional units. Are dealers telling you, look, we love – we’d love more, I guess, why now?

We had a – I guess a recent touch point with all of our dealers when we’re at the Louisville show. And we had our 45-foot product, which is the product that we want to be building in West Coast first and foremost and very favorably received. And so part of our confidence is that, there’s a part of the market in Class A diesel that we’re currently not even really a player and active beyond the 42-foot length. And so, there’s opportunity for us there. And as we transition the rest of our product offering and continue to innovate and develop additional choices, we think that there’s a lot of demand just based on the validation at the Louisville event. And from a Class A gas and C perspective, we’ve had to rationalize where our production slots go to for the last 18 months maybe even a little bit longer than that. So we’re anxious to be able to have the capacity to address the demand in some of the product category that we haven’t, in our view adequately addressed in the last year-and-a-half.

Got it. Thanks so much.

Yes. Thank you, Craig.

Our next question comes from Michael Swartz with SunTrust. Your line is open.

Hey, good morning, guys.

Good morning.

Hey, as I look back over the past 12 and 18 months, and this is really a follow-up to Craig’s last question maybe asked a different way. I mean, the Class A results backlog that you guys have been reporting has been softer than what we see in the wholesale and retail shipments, and it was like you’ve lost some share in the Class A. So, I guess, is there a way you can help us think of how much of that under shipment in retail share loss is coming from the decisions you’ve made internally to prioritize other product versus maybe just not having the right product in the right place?

Well, in our view a significant part of that is the fact that we’ve concentrated our production to Class B and C. We’re currently at 35% market player in the B space, and we really have moved the needle there. But it’s at the loss of having allocation and production capacity for some of these other product categories. So part of it is, where we focused our efforts. Obviously, it’s you always have to be developing and bringing new choices and product offerings to the marketplace, which I think we have a great track record of being innovative and bringing those kinds of products to the market and we’re not stopping at this point in relation to planning for the future in those segments, where we want to move the needle. And we have to time it with the that capacity and having existing and new products to all execute as we’re discussing here. But it’s a huge function of where we’ve put our time and energy on production. And that that’s our objective to alleviate that constraint. So we can satisfy demand across all product categories.

Okay. And then just following up, I mean, it doesn’t sound like there’s an inventory issue in the channel. I mean, you’re not under shipping, because there’s too much out there just where you’re reallocating your resources?

Yes, it’s in our view.

Okay. And then with the new capacity coming online, it sounds like units are producing their mid-2016, calendar 2016. Should we think about the Class A production schedule, or just wholesale shipment rate as been kind of depressed until we can get more capacity online, is it the right way to think about it?

Yes, I think it is.

Okay. Okay, it’s helpful. And then just on the ERP side, Sarah, I’m sorry, could you go through and just reiterate what your expectations are from a cost perspective on that program over the next 12, 18 months?

Oh, certainly. So as I mentioned I – in light of our expansion on the West Coast, we do have incremental costs associated with our ERP implementation. And then there’s other two key areas that in light of been – we worked on this now almost for a year. We have a better perspective of the time and energy and cost it’s going to take to go-live. And so, we’ve moved our overall estimate from the $16 million up – that was upper end of our range before to $25 million. That that’s going to be a function of incremental West Coast ERP implementation expense. A piece of that is related to integrating to our product lifecycle management system here. And then also the complexity of our bills have proven to take more time and energy than we originally planned, that’s going to take some more dollars. We’re still looking at 60/40 capitalization versus expense split. All right. When you look at how it played out in – on a cumulative basis now, we spent about $8.6 million of which $4.7 million has been capitalized and about $3.9 million expensed. The run rate as we highlighted this quarter was $1.4 million. That was a little bit up over our Q4 expense rate, we are at $1.3 million there. And so, we’re really in the midst of it, I mean, with a number of things that went live inside the quarter, and number of areas that will go-live in the second quarter, we’re probably going to be at this run rate here for the next few quarters on the expense side of it. But those are the key pieces of information we wanted to share on the call today. And we’ll be filing our Q in the next week, and as always have disclosure there and all these facts too.

Okay, wonderful. Thank you, Sarah.

Thank you.

Our next question comes from David Whiston with Morningstar. Your line is open.

Thanks. Good morning.

Good morning.

I had a few issues I want to touch base with you on. Can you first talk about why you’re saying of a favorable mix in motorized even though Class A deliveries were down 19%?

There’s a different margin profile inside of all of our categories. And so in light of the constraints we faced, we’ve really maximized our production slots to the best margin product in the Class B and C categories and then Class A. And so that is contributing to that substantial 170 basis point improvement that I mentioned earlier. So it’s not just the fact, yes, there’s really great margin profiles in every single class of product that we build.

Okay. And on the warranty issue, I have covered you guys a while, I never really heard you talk about this until recently. What’s been happening that wasn’t happening before and somewhat related to that is, are you having an issue, or perhaps you’ve been hiring some people that you wouldn’t normally have hired and that’s causing some defects?

Well, with the substantial growth that we experienced over the last couple of years, we have hired a significant amount of new people. And it’s having ensured that we have adequately trained all of the new employees. We talked a little bit about this in the last few quarters that we’ve taken a concentrated effort to ensure our training is adequate, because that’s a key part of having good completion rates off the line. When you look at overall warranty as a percentage of revenues, we’ve historically been less than half of what some of the competitors in this space would be. We’ve ticked up a little bit, but we’re still not at that level. But if something that we want to ensure that we’re taking the effort here now to address it going forward. Another element of this is, we introduced the significant amount of new product into the channel. And the complexity in all those new products also can put up strain on our resources and that kind of circle back to training as well. But we’re focused on ensuring that we have the right training and the unit is complete coming up the line to the best of our ability, and then we have the right inspection occurring. So that the units going to our dealers we can stand proud for.

And would you say there’s still a lot more work to do on the training, or is there a lot of that already completed by now?

All right. It’s – I think we’ve made substantial efforts and improvements there, I mean, it’s always going based on the people coming in and coming that. We’re working on reducing turnover and now at all levels in all areas of the facilities and there has been great improvements in the areas where we saw apply the most significant issues. Some of it is a function of people to and having the right plant managers and line managers in place. And so we’ve accomplished a lot here in the last three to six months.

Thanks, it’s helpful. And just one more question on free cash flow. The drain from inventory was better by about $14 million year-over-year. I was just curious is that a function of mix this quarter, or is there something in last year’s quarter that was bit more abnormal on the build up?

Yes, last year during this quarter, we experienced a number of challenges. And so, I think, that’s a fair way to look at that in regards to where we were a year ago, was not ideal.

Okay. Thank you.

Yes. Thank you.

Our next question comes from Matthew Paige with Gabelli & Company. Your line is open.

Hey, good morning. Thanks for taking my call, Sarah.

Oh, good morning.

I think, first, can you just kind of talk about in light of rising rate environment. How does that impact your Class A market outlook, particularly on the diesel side?

Well, that’s a good question. I mean, we spent a lot of time over the past years all anticipating when the interest rate movement would actually occur. And this is very, very small in the grand scheme. And so, I think, it’s more of a question, how fast or how many basis points we’re talking about. But this specifically, I don’t think is significant. And it’s, I guess, it’s more a function of, we’re finally back to normal after eight years of no rate in that range of any movements on our interest rates are still very, very low. So I don’t think this is a significant impact from an outlook standpoint. I think it would be more significant, if we are talking a more substantial number. Our inventories that the dealers purchase are typically floored. So, I mean, that’s a cost they have to manage, and then at the retail level as well. But our outlook is still positive and in line with what RVIA is looking for in this next year, it’s a low single-digit growth, but I think that’s achievable.

Great. And then when you talk about fast transitioning away from the extrusion functions into other areas in plant. How usually can staff transition?

Well, we work really hard to find the right places to move on the people, because the whole goal here was to keep these people and use them in other ways. Right now the big – the first transition has been an off-shift work. And so we were able to find second and third shift, where we needed people and make those transition. We knew that there would probably be some that retired as a result of this change, but we’re seeing success in regard to be able to smoothly do this, and that’s the objective.

Right. And then do you have an update on the CEO search?

Well, Scott Folkers had shared a couple of comments on that, so I’ll maybe let him speak.

Again, at this point in time, the Board continues to conduct the search for our next CEO with a great deal of diligence and energy. And as soon as we have any additional information on that, we’ll be doing a release.

Right. And then just kind of one last thing from me is, we’ve been without a CEO for a couple of months. Has it had any impact on any strategic planning that you’d like to do? Is it something that you would have liked to have gotten done, but are waiting for a CEO to be found?

We have been very busy in the last four or five months notably with the West Coast expansion, it’s been something that we have been considering for an extended period of time. So I would say now that that hasn’t precluded us from moving forward. That’s a tactical solution for us. It has some strategic implications for sure. But we have needed to address the labor constraints for well over a year and pretty excited about finding a location in the country that has a wealth of RV experienced people, and a facility that, granted, there are some modifications to be made, but I mean it’s a great facility. So we’re pretty excited about that and more busy with a number of other big projects as well. ERP is huge in relation to the level of efforts and the opportunity that present. So, we are working hard and it’s not holding it back.

All right, great. I appreciate the time.

Thank you.

Our next question comes from Kathryn Thompson with Thompson Research Group. Your line is open.

Hi, thanks for taking my questions today, and we’ve appreciated color that you have given throughout the call on the plant at West. But it may – it’s just going to evolve with a few just additional conceptual questions about the plant. One, it’s our understanding that motorhomes were already being manufactured at this facility previously. So when you think about retooling that facility, how much will it be a completely retooled, so really getting up and looking more like a Winnebago facility in Iowa versus more of a tweaking. So just really trying to understand kind of the mechanics of that retooling process. Thank you.

Oh, certainly. As it relates to what’s been going on in this facility really it’s been utilized as a service facility for country coach product that was built prior to their bankruptcy. So it hasn’t been actively used for through production in this period of time other than maybe piloting. And when you look at what had been on the campus for this company, we bought a portion of what related to that campus, but some of those other buildings had already been sold over the years. So in our efforts to layout a design, we’re not interested in redoing what we do here in Forest City. It’s an opportunity to look at what, what’s the most efficient way to approach that, because the facilities we have in Iowa were built long, long ago and meant for mass production of a much smaller product. So it is giving us an opportunity to really approach it differently. But there isn’t much in there right now. There are some equipment that came along with it paint booths and a few other items. But there are some pretty important things that we need for equipment to get up and running. And I guess those would be the – maybe the key points to answer your question, Kathryn.

Yes, and that’s helpful. And then just conceptually assuming that you were looking at facilities across the U.S. How is it – what were the attribute to this facility versus other properties that you were looking for that led you to pull the trigger with this strategy?

Labor was a pretty significant part of the evaluation and looking at what was a potential for us there in light of the constraints we faced here and having a pool of experienced professionals and that have a lot of talent, because they used to have a lot of motorhome production in that area. So that was a very key being on the West Coast on the – that side of the country was also appealing, because in addition to producing there, that affords us the ability to have a service center. So we can service Winnebago branded product as well. So those are some of the key thought processes and factors in our evaluation.

Okay. And then finally just a clarification on Class A backlog decline. How much of that is just the continued inability to meet demand versus perhaps just slightly slower fundamental to then, does that make sense in terms of our phased question?

Yes, it’s hard to maybe make a split to say, it’s – this is how much of the reason. When you look at the backlog, it’s self-fulfilling to some degree in regards to where we’ve been devoting our production slots. And then in RVIA to a piece of it is having on the 45-foot on product availability and offering to our dealer partners. And they had a chance to see that new product just a few weeks ago, and that’s the first and foremost what we want to get up and running in our new facility. So it is a combination of both of those, but it’s hard to say how much one reason is over the other.

Okay, perfect. That’s very helpful. Thanks very much, and good luck as you go into the calendar 2016.

Okay. Thank you very much.

[Operator Instructions] Our next question comes from Brian Rath with Walthausen & Company. Your line is open.

Thanks for taking my questions. The first one I had was just on the increase in G&A. I think you called out the $1.4 million from ERP, but it looks like year-over-year that the increase was closer to $2.5 million. So I’m just curious what else is in that G&A step-up?

The majority of the remaining increase our search fees associated with the profit the Board is going through for the new CEO.

Is that close to the full other $1 million that increased year-over-year?

That’s the most significant component. If you look at some of the other drivers there, from a strategic sourcing perspective, we had 2000 – $200,000 of spend associated with that project before we internalized that project management of that process. We also have a little bit increased legal expense that can fluctuate from quarter-to-quarter. But when you look at the most significant driver, it would be first and foremost the ERP spend of $1.4 million, which we didn’t have that at all a year ago and the associated search fees in Q1.

Okay, all right. And then, on the gross margin [indisernible] has talked a little bit about the benefit from product mix and looking at the backlog, as we see a similar shift in mix. So should we assume that we’ll see that continued benefit for the remaining part of the year from that product mix?

Yes, we definitely have an opportunity, and when we look forward last year in our second quarter, our consolidated gross margin was 10.3%. So it was a very low margin. Seasonally, the second quarter is probably usually our lowest margin quarter inside of a year in light of the number of production days and some of the seasonality of it. But we very much have an opportunity with the product mix side. We’re excited about the – if we can also make headway on the better efficient use of our labor that was a pretty sizable pressure for us inside the quarter and continuing to see the benefit of strategic sourcing as we touched upon. So there’s a number of ways we can continue to see better margins in the coming quarters than we did a year ago at this time.

Okay. And switching to the Junction City facility, you only talked about $15 million to $20 million of spend to bring that facility to be ready for production. Can you break that down into the buckets of where that spend is mainly going to be? Is it on equipment? Is it on the facility layout? Can you just break out like how that spend will be allocated?

All right. Approximately, probably a little over half of that $20 million we anticipate in aggregate will be related to the land and buildings. So a piece of that we’ve already purchased, we’re looking at potentially more investment needed on incremental buildings from a service standpoint. And then the other significant piece would be that associated ERP implementation and necessary IT equipment that we would need out there for getting us up and running. And the next most sizable components would be the equipment and building modifications. So if you kind of order it in one, two, and three, that would be how I would layout the key components of that spend.

All right. So the – of that $15 million to $20 million that includes ERP spending, which also then is included in the step-up in your full estimate to $25 million for ERP, they are both inclusive of that facility?

Yes.

Okay. Okay. And then just lastly on the CEO search to the extent you are able to comment, just curious, I mean, has there been scenarios where the Board has taken a certain candidate down a path and has backed out? Has there been like a disruption to where a candidate was chosen by the Board and didn’t succeed, or can you say there’s currently – is it down to a single candidate, two candidates, or just how close are we to getting that announcement? Anything you can comment on would be helpful?

And I appreciate your curiosity and probably no one is more curious than we are. But again at this point in time, the Board has indicated that they’re continuing their search for a CEO. And, again, as soon as we have the information, we will get the information out to you. That’s about all we can say at this point.

Okay, thanks. That’s all I have.

Thank you. And I’m showing no further questions. I will now turn the call back over to Sarah Nielsen for closing remarks.

Thank you for your continued support and interest in Winnebago Industries. We look forward to reviewing our second quarter results with you on Thursday, March 24 at 9:00 AM Central. Happy holidays.

Thank you, ladies and gentlemen. That does conclude today’s conference. You may all disconnect, and everyone have a great day.