Winnebago Industries, Inc.

Thank you for standing by and welcome to the second quarter 2021 Winnebago Industries earnings conference call. I will now hand the conference over to Steve Stupor, Vice President of Investor Relations.

Thank you, operator. Good morning, everyone, and thank you for joining us today to discuss Winnebago Industries fiscal 21 second quarter earnings results. I'm joined on the call today by Michael Happi, President and Chief Executive Officer, and Brian Hughes, Senior 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 later today. The news release with our second quarter results was issued and posted to our website earlier this morning. Additionally, we have posted our first-ever quarterly earnings supplement a compilation of slides that should serve as an efficient way to understand our second quarter results and provide context related to our company and industry trends. Before we start, I'd like to 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 in 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 I encourage you to read. With that, I would now like to turn the call over to our President and CEO, Michael Happi. Mike?

Thank you, Steve, and good morning to everyone on today's call. As always, we genuinely appreciate your interest in Winnebago Industries and for taking the time to join us. As we continue to navigate the pandemic, we very much wish great health for each of you. Now, we have stated it often, but these are interesting, dynamic, and exciting times for our company. I will start this morning's call with an overview of our very solid second quarter performance before turning it over to Brian Hughes, who will specifically discuss our financial results in more detail. Then I will offer some closing thoughts, and we will conclude with a Q&A session. We are very pleased to share that Winnebago Industries delivered another quarter of outstanding financial and operational results. On a year-over-year basis, we grew our top-line net sales by 34%, expanded gross margins 590 basis points, and increased operating income by 237%. These outcomes are especially a reflection of the extraordinary Winnebago Industries team who continue to deliver time after time while leading with our values in all they do. Our teammates are truly our greatest asset, and we are very focused together as one enterprise organization on creating tremendous value for our end customers, channel partners, communities, and shareholders. In addition to our employees and their impressive agility, Winnebago Industries' continued growth and successful execution is attributable to three other key drivers. Number one, our leading portfolio of premium outdoor brands, Winnebago, Grand Design, Numar, and Chris Craft. Second, Winnebago Industries' ongoing commitment to operate with excellence and deliver exceptional quality innovation and service in everything we do. And lastly, a win-win partnership mentality with our valued dealer network to create and sustain strong consumer demand for our leading portfolio of outdoor products. While we have undoubtedly been active via acquisitions in the last four plus years, Fiscal year 2021 quarter two represents a truly organic year-over-year comparison in total performance. The second quarter of fiscal year 2020 was the first full quarter in which Newmar's luxury motorhome line was included in our world-class portfolio. One year later, we continued to nurture the tremendous appeal of Newmar's growing product lineup and its relentless focus on craftsmanship quality, and customer care. Our collective enterprise results in the second quarter of fiscal year 2021 validate a strong, complete, full-line RV strategy is now in place here at our company, and the premium organic portfolio of RV brands are positioned to compete vigorously in the years ahead. Now, there is a distinct strategic cause-and-effect linkage between our premium brands and golden threads of quality innovation and service and the strong financial results that are being shared with all of you today differentiation and strong value can drive sustained market and financial performance that is and will always be our goal additionally our team's ability to navigate constantly challenging environments related to component cost and availability is on display through our numbers as well we took and and well-take actions to ensure our pricing reflects both the surging demand for our premium brands, but also the input cost inflation that is expected in the coming quarters. Our ability to sell products at attractive margins and continual levels of discounting seen across the RV industry contributed to our profitability performance in the quarter and continues to reinforce our brand strength with dealers and in consumers. And as importantly, our enterprise-wide commitment to operational excellence, productivity, continuous improvement, strategic sourcing, et cetera, was also a significant driver of our performance and resulted in strong second quarter profitability. As a result, our consolidated second quarter gross margin of 18.6% represents an increase of 590 basis points versus last year. We are passionate about driving operational leverage within the business and maximizing the return from our current assets. Our manufacturing processes are running daily at peak levels as the supply chain allows and executing against an increasingly robust order backlog to replenish as quickly as possible inventories for our dealer partners. The shift we made in the back half of fiscal year 2020 to fully build to confirm dealer order production in our Winnebago branded RV businesses continues to serve us well in terms of profitability and working capital management. While demand driven supply chain challenges regularly impact our production, particularly in Class A motorhomes, we will constantly work with our supply partners to manage any future disruptions as best we can. Our Q2 results demonstrate the supply network is assisting in incredible year-over-year production volume increases. And for that, we are appreciative, maintaining gratefulness and context. But we also continue to be restrained from hitting full manufacturing potential, given almost daily component availability challenges. Quarter to lost net sales due to sourcing constraints was easily eight figures across the portfolio. That revenue opportunity remains inherent in our potential as we transition into quarter three. The third major driver of our fiscal year 2021 second quarter performance was sustained strong consumer demand for our products, both as wholesale appetite from our dealers, but especially at retail within consumers. We are not seeing any significant decline in retail momentum and outdoor product demand as we turn into the spring 2021 selling season. SSI results are often a lagging, incomplete barometer of the retail health in the industry. And our company's retail numbers in the first two to three weeks of March have actually shown sustained strength and even an uptick in certain categories. The RV and marine industry have succeeded in comping effectively over a somewhat normal pre-pandemic period in early calendar 2020. And the next three months of 2021, March through May, which is our quarter three, we'll see strong retail and wholesale comparisons versus a period of intense marketplace disruption a year ago. Throughout the pandemic, we have proven our resilience and ability to execute during difficult macroeconomic and large-scale health crisis conditions, just as Winnebago Industries has continued to expand our reach during other challenging periods in our history. Currently, we are experiencing a flattening of seasonality at wholesale and at retail. Our calendar 2021 January and February retail sales were similar to our November and December performance, underscoring that even through the typically slower winter months, Consumers are excited about our brands and intent on securing the product they need to have extraordinary experiences with family and friends this summer. The strong demand undercurrent we are seeing presently has meaningful implications on our business now as well as over the long term. Welcoming new entrants to the outdoor lifestyle allows Winnebago Industries the opportunity to capture significant customer lifetime value that our portfolio provides. First-time buyers of both motorhomes and towables tend to gravitate towards value models. By delivering our golden threads of quality, innovation, and service, as well as the breadth of premium products for families to grow into over time, we are cultivating a broad growing pipeline of Winnebago Industries consumers as they upgrade on average every three to five euros when staying within the lifestyle. Before turning the call over to Brian, we want to acknowledge the fact that it has been just over one year since the COVID-19 pandemic changed just about everything in terms of how we live in the U.S. The past 12 months have been marked by heartbreak and grief caused by the deadly virus. There's been a call for unity in a deeply divided nation. and an overdue reckoning on widespread racial inequality. As we continue to persevere and grow our business, we have also made it a priority to enhance and advance our corporate responsibility efforts and ensure that our company has the resources, infrastructure, and commitment to be a valued partner to the communities in which Winnebago Industries stakeholders live, work, and play. With that initial overview, I will turn the call over to Winnebago Industries Chief Financial Officer, Brian Hughes.

Thanks, Mike, and good morning, everyone. Second quarter consolidated revenues were a record $839.9 million, which is an increase of 34% compared to $626.8 million for the fiscal 2020 period, driven, as Mike noted, by strong consumer demand for Winnebago Industries' great brands. As Newmar operations were fully included in our fiscal 2020 second quarter, we will no longer be speaking to reported versus organic sales as it relates to Newmar for our quarterly results. As a reminder, 100% of Newmar is reported in the results of our motorhome segment. We achieved another period of very strong profitability in the second quarter of fiscal 2021. Gross profit margin increased 590 basis points to 18.6%, while adjusted EBITDA margin increased 570 basis points to 12.9%, compared to 7.2% for the fiscal 2020 period. Similar to our fiscal 2021 Q1 performance, this significant margin expansion was driven by favorable pricing, including lower discounts and allowances, productivity initiatives, operating leverage approximating 200 to 250 basis points, and segment mix. Reported earnings per diluted share were a record $2.04 compared to reported earnings per diluted share of 51 cents in the same period last year. Adjusted earnings per diluted share were likewise a record at $2.12 in the second quarter for an increase of 216% compared to the same quarter in fiscal 2020. Adjusted EBITDA was $108 million for the quarter, compared to $45.4 million last year, which is an increase of 138%. The increases in both adjusted earnings per diluted share and adjusted EBITDA were driven by strong unit growth, pricing actions, and productivity initiatives, most notably in the motorhome segments. Now I'll turn to our segment performance, starting with tollables. Revenues for the tollable segment were $439.3 million for the second quarter, up 55% over the prior year, driven by elevated consumer demand across the tollables portfolio. Winnebago Industries' unit share of the North American tollable market continues to grow, as share on a trailing three-month basis through January 2021 was 12.4%, or an increase of 80 basis points over the same period last year. Segment adjusted EBITDA was 62.4 million, up 79.5% over the prior year period. Adjusted EBITDA margin of 14.2% increased 190 basis points, primarily due to favorable pricing and operating leverage. Next, let's turn to our motorhome segment. In the second quarter, revenues for the motorhome segment were $382.6 million, up 17.5% from the prior year, driven by increased unit sales in our Class B and Class C products. Compared to the same period last year, second quarter Class C unit sales were up 24.5%, while Class B products were up a very robust 81%. Class B market share continues to be strong as evidenced by our rolling three-month retail unit market share of 45.7% through January of 2021. Similar to last quarter, our new RV business continues to be challenged by supply issues that are more pronounced relative to our other RV businesses due to the more specialized supplier base that serves this high-end business unit. We estimate the revenue impact to be in the tens of millions of dollars through Q2 year-to-date. Segment adjusted EBITDA was $51 million, up 241% from the prior year. Adjusted EBITDA margin increased 870 basis points over the prior year to 13.3%, driven by our ongoing focus on operational efficiency, including the transition to a build-to-dealer-order business model in the Winnebago-branded motorhome business, as well as several other operating improvements and lean initiatives that our business has pursued since over the past several years, in addition to pricing actions to ensure our pricing is commensurate with market dynamics and also operating leverage. While we continue to anticipate inflationary pressures and remain conscious of competition that may impact our net pricing equation, as well as continued supply chain challenges, we are encouraged by another quarter of sustained improvements to our margin in this segment. As we have stated previously, we continue to expect to achieve a level of sustained profitability that is notably above the 4% to 5% EBITDA yield we've delivered in this segment for the past several years. We are pleased to see this meaningful improvement and progress against our strategic focus on restoring leadership in our motorhome segment. Now turning to the balance sheet. Continuing the trend from Q1, our leverage ratio, net debt to adjusted EBITDA, continued to decline and is now 1.0 times, which is towards the lower end of our targeted range of 0.9 to 1.5 times, driven by both strong EBITDA generation and lower net debt due to the increase in cash balance of now $333 million. Total liquidity, including our untapped ABL, is now in excess of $500 million. Cash flow from operations was a healthy $66.9 million for the first half of fiscal 2021. Working capital remains slightly elevated due to the inconsistent supply chain delivery, but we continue to expect further improvements in this area in the coming quarters. Our effective tax rate increased to 23.4% for the first six months ended February 27, 2021, from 20.1% for the same period last year, primarily due to consistent year-over-year credit over higher current year pre-tax income and favorable R&D discrete items in fiscal 2020. For the full year, we currently expect our tax rate to approximate 23.5% to 24%, excluding all discrete items from year-to-date results and those that may occur in the remainder of the year. Our capital allocation priorities remain consistent with those communicated in the past, investing in our businesses to drive organic growth, executing strategic expansion to our portfolio through M&A, maintaining a strong liquidity position, managing our leverage ratio within our targeted range, and returning cash to shareholders. During the second quarter, we paid a dividend of $0.12 per share on January 27, 2021, and our board of directors just approved a quarterly cash dividend of $0.12 per share payable on April 27, 2021. That concludes my review of our quarterly financials, and with that, I will now turn the call back to Mike to provide some closing comments.

Thanks very much, Brian. Before we open the call to questions, I want to touch efficiently on three topics. One, our estimates for RV industry retail and wholesale performance in fiscal year 2021. Two, our thoughts on the probable length of the RV field inventory replenishment cycle and steps we are taking to expand capacity. And three, recent progress at Winnebago Industries on important corporate responsibility priorities. In our fiscal 2021, which is September of 2020 through August of 2021, we believe RV industry retail will grow in the mid to upper single digits, while industry wholesale shipments in that same period will grow approximately 40% to 45%. Quarter three, March through May for our company, industry retail should be especially strong given the comparisons versus 2020. But quarter four for our organization, June through August, industry retail, we'll see a more challenging comparison environment due to record-breaking bounce-back RV retail last summer. It is always our intention over the long term for Winnebago Industries retail pace to exceed that of the industry. Please note that our fiscal industry wholesale shipment projection considers and aligns with the RV Industry Association calendar year 2021 industry midpoint forecast of approximately 533,000 units, or plus 24%, a forecast which we support. Our most recent field inventory reports early here in quarter three continue to show low field inventory levels in Winnebago Industries RV and marine businesses. Depending on the brand or the product category, field inventory is anywhere between 20% lower than a year ago to 60% lower. While many of the dealers we visit with regularly have a desire to run their operations at a higher turn level in the future than that of the pre-pandemic days, they are many, many, many months from reaching that targeted turn rate. We anticipate that unless there is unexpected severe disruption to our own or the industry's retail performance due to macroeconomic or health developments, that it will take through our entire fiscal year 2022 to have most of our businesses in a more normal retail to wholesale replenishment status. To support this drive to replenish field inventory, we are actively pursuing and executing several capacity expansion projects within our company, which will position our organization well for future market share gain opportunities. Some investments are organic and do not require the addition or expansion of square footage or overhead, while other projects will necessitate a physical increase in infrastructure. Each RV and marine business unit here at Winnebago Industries has active capacity expansion efforts underway. We will not share details for competitive reasons. Physical assembly line extensions, standing up new lines in existing buildings, adding vertical manufacturing space and capacity, constructing new assembly buildings, shifting product lines and mix within our existing lines and facility, along with online productivity and lean initiatives that reduce waste and improve output rates. Each of these are active today across our portfolio. Multiple eight figures of capital is being invested currently and will likely continue well into fiscal year 2022. And our financial results should gradually show the benefit of these investments each quarter. Earlier this month, Winnebago Industries announced we are expanding our long-standing partnership with the National Park Foundation, funding a new initiative to create more equitable outdoor spaces by connecting women and outdoor enthusiasts of color with meaningful career opportunities in national parks. Initiatives like these are not only demonstrative of our enterprise brand tagline, Be Great Outdoors, but enable us to support our communities in meaningful ways that enhance the long-term sustainability of our business. In addition to pursuing external social initiatives, we also are focused internally on responsible governance. Just last week, we announced the appointment of two new members to our board of directors. Jacqueline Woods and Kevin Bryant bring deep professional active experiences and differentiated valued skill sets that will help Winnebago Industries continue along its strong transformational path of growth and innovation. Both Jacqueline and Kevin have extensive experience in building inclusive, high-performing teams that are market-focused. We look forward to their input and guidance as Winnebago Industries continues to strategically progress into a more competitive, diverse, and profitable outdoor lifestyle company. Looking forward to the second half of fiscal 2021, Winnebago Industries remains committed to advancing our core values and our operations and our communities, executing on our strategy, capitalizing on opportunities created by favorable market dynamics, and innovating to sustain the unique appeal of our products with consumers. That concludes our prepared remarks this morning. Thank you for your time today, and we hope you and your families are staying safe and healthy. I will now turn the line back over to the operator to facilitate the taking of questions.

Thank you. And as a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Our first question comes from Scott Stemberg with CL King.

Good morning, guys. Thanks for taking my questions, and congrats on a great quarter.

Thanks, Scott. Good morning.

Maybe could we just dig into the motorized side? It sounds as if most of the revenue shortfall, if not all of it, was related to Newmark. Could you maybe just dig into that a little bit more? I know last quarter we talked about it, but maybe the timeline on how long that takes to get remedied. And then on the core Class A business in particular, you know, Winnebago branded. Can you talk about how they're doing it in retail? And that's it. Thanks.

Yeah, good morning, Scott. This is Mike. Specific to the Class A comments we made in our prepared remarks, you are correct in the sense that most of the supply chain constraints affecting optimized shipment performance are happening in the Newmar business. That's not to say they're exclusively in Newmar, but most of the supply chain constraints on Class A's are definitely affecting the Newmar business. That is an active situation every day. During our last earnings call, we had foreshadowed that we had hoped to resolve most of this within probably the next 90 days. It appears that's going to take a little bit longer to work with our suppliers to manage through some of the constraints in several different component categories. The business inherently is performing, Numar specifically, is performing well at retail and we are pleased by the results we are seeing in the field from a retail standpoint, but it is important that we get our dealers under the Numar brand more inventory than they have today. Specific to Winnebago branded motorized performance at retail, those results are also positive. They are definitely weighted towards the Class B segment, where the Winnebago brand continues to have strong market share, but has also introduced several innovative products here recently, i.e. the SOLUS, that continue to generate strong consumer demand. We are very excited in quarter three about the launch of our new Class C product, the Echo, which has been introduced to the consumers and our dealers for several months now. Order generation on the Echo has been very strong, and we anticipate in quarter three we'll start seeing a shipment impact from the Echo, and ultimately we believe strongly that our Class C retail results will continue to move in a more positive direction because of that product and other improvements.

Got it. And then staying with motorized regarding profitability, the 13.3% I think was eye-popping, obviously, and way more than most of us expected. When you talk about your comments about being way above the low to mid single digits of the past, just talk about how sustainable this level is that we're seeing right now in this low to mid

Yeah, Scott, this is Brian. As we talked about in the call, there's several things driving the strong profitability. Pricing, certainly notable. The operating leverage from the growth. We cited in a couple instances the productivity improvements or the lean initiatives. There's also, from a percentage standpoint, A product mix impact, you know, when you're looking at margin improvement, that's what I'm referring to there. Mix, when you're looking at a dollar impact, not as big of a driver, right? But from a percentage standpoint, it is because our Class B growth there is helping our margin. So several things that are contributing to it. The sustainability is the fair question that we often get. We made the comment that the 4% to 5% that we have had historically in this margin, and you've been around us for many years, so you know the historical level of profitability we've seen here, and that we expect notable improvements versus that 4% to 5%. We also pointed out that the margin improvement from operating leverage is in that 200 to 250 basis point. range. So we're giving some clues as to some of the drivers here. We feel good about the improvements that we're seeing and Mike just noted a couple of them to the product line and think that the health of the product line will certainly be a contributing factor here. But also several of these productivity improvements that we've cited are also sustainable in terms of our go forward margin. So while we don't provide a breakdown between pricing and productivity improvements and product mix, et cetera. Hopefully, you know, the comments that we're making provide some guidance as to the sustainability of that margin improvement and where it's coming from.

Got it. That was very helpful. I'll jump back into the queue. Thank you.

Thanks, Scott.

Our next question comes from Alice Wickland with Baird.

Yes, gentlemen, thanks for taking my questions. You mentioned on the call briefly some of the expected input cost inflation in the coming quarters. Can you talk about that in a bit more detail, how you expect to manage it and your ability to pass any of those cost increases on?

Yeah, good morning. This is Brian again. I'll address that one, and Mike can jump in with anything further. We do not believe that inflation has been a meaningful component in our year-to-date results, either Q1 or Q2. There's certainly rumblings across many industries of inflationary pressures. We're seeing it some in the commodity space. We're certainly accelerated by some of the freeze across the south that affects important commodities to us. All that said, we work very closely with our supplier partners to identify where those pressures might be. We feel that from a strategic standpoint, the relationships we've built with our supply network are a differentiator in the industry, and we feel good about that relationship building that we've done, and it helps us to manage through situations like this in a proactive manner. Those inflationary pressures, ideally you work through them with your suppliers. To the extent that we can't, we do intend to price to offset those inflationary pressures. The market certainly supports our product line in that manner. And so we will use pricing where necessary to make sure that we offset any kind of inflation that we're going to see in the coming quarters. But we do expect, to be clear, we do expect greater pressures in the coming quarters compared to what we've experienced year to date.

Great, that's helpful. And then just between some of the supply chain issues and the components that you're dealing with, the rapid pace of growth, what are the Winnebago brands doing to ensure quality standards are maintained through this period?

Thank you, Alice. This is Mike. First, a comment on the supply chain, because I want to make sure we have a balanced message this morning. I believe in quarter two, and Steve, correct me if I'm wrong, but I believe in quarter two we shipped 49% more units to the market than we did in quarter two a year ago. And that's just an astounding result from our teams. And there is absolutely no way we would have been able to accomplish that increase in wholesale output without tremendous support from our supplier partners. The suppliers have been working just as hard, if not harder, than the OEMs to stay ahead of our forecasts and the demand. So the constraints are still real, but they are really preventing us from reaching our potential in that regard. So your question was specifically around product quality. Each of our businesses has their own distinct quality teams and operations and processes within their businesses. Really, we think about quality in many dimensions. Product design is an important aspect of that. Certainly what you do in assembly, supplier quality is important and then we also do a lot of inspections post-assembly in our ship out areas. We also have an enterprise quality team that is there to support the business quality teams as desired. Our teams have been keeping in very close contact with the suppliers on a regular basis and while we don't inspect every part that comes into our facilities, we have several processes inherent to our assembly operations, but also early warning signs within our warranty and dealer service processes that give us an early indicator if we're seeing something that is of concern. It's a great question because part of our DNA is certainly to have products with high quality And it's something our team has been talking about and actively working on regularly.

Great. Thanks, Mike. That's all for me.

Thank you. Our next question is from Derek Johnson with BMO Capital.

Great. Thank you. Good morning, guys. Hey, I had a question on chassis availability on both sides of the business. I mean, obviously components can be worked around, but you can't build without a chassis. So how does that look?

Good morning, Eric. Chassis availability has been very steady. In this environment, nothing is perfect. Our team does manage certain chassis availability problems from time to time. But I would tell you we are pleased with our motorized chassis suppliers generally with how they have worked hard to keep up with increasing demand, both within the Winnebago but also the Newmar brands, our supply chain constraints have been more related in those businesses to components versus the actual chassis. And as you might imagine, chassis are some of the longer lead time component subsystems in our bill of materials. And so we give our chassis manufacturers long range forecasts based on what we believe our demand will be and work with them many, many months in advance to understand what they can provide us. There has been a lot of chatter around the auto industry being affected by sort of the chips and semiconductor shortage around the globe. We have not seen a significant impact to our chassis because of that specific issue, but we are in daily contact with the chassis manufacturers in the event that they see that particular topic begin to affect our chassis platforms. But to date, Garrick, you know, it's been pretty reliable.

Okay, great, and thank you. Just one more, if I may. You're talking about price increases to cover inputs and, you know, the strong demand. So on a like-for-like basis, can you talk about what kind of increases you're implementing on pricing?

You know, it really varies across the board, Garrick. You know, the pricing power that we have recently been able to Display in our Winnebago motorized business is almost Exclusively tied to the innovative and differentiated products that we've been bringing out And you know some of those like the rebel And we've talked about here with the new product coming to market this quarter of the echo when you design and bring to market an innovative differentiated product and that hopefully resonates with consumers, and all indications are that many of those products will. We've been pricing to market, not pricing to cost, which maybe was a past habit of previous regimes. So I can't give you a number per se that is more standard or average. I will tell you as our teams are turning towards model year 2022, You know some businesses are starting that transition and other businesses are a couple months away from that That they are discussing pricing You know changes that are probably somewhere in those low single digits and as Brian's inflation comments were You know lifted and put on the table here we will we will be agile and adjust pricing strategies as needed and if we begin to see commodity or component inflation rise higher than what we believe it will be for model year 2022. But our teams are planning what is usually a price increase, but probably a little bit higher going into model year 2022 because of some of the inflationary risks that we see in the next probably six to 12 months.

Okay, great. Thank you, Mike.

Thank you. Our next question comes from Mike Schwartz with Truett Securities.

Hey guys, good morning. Just maybe a higher level question. I know you're not giving guidance, but when we look at the $2.12 in earnings in the second quarter, I think there's a question out there just around You know, is that kind of the sustainable rate of earnings that we should be kind of factoring in over the coming quarters until the backlog really starts to come down? I know there's some puts and takes, but maybe just walk us through that and your views around that.

Yeah, I think, Mike, first of all, good morning. We are very pleased with the results you've seen in the past several quarters, especially the first two quarters here in fiscal 2021. And I think it would be fair to say that you're seeing a trend towards stronger, sustained profitability in the business. I think we've noted a couple themes this morning that would make me a bit nervous to give you stronger guidance. The supply chain challenges continue to be present, so that's one. Inflationary pressures, as Brian talked about, is two. And there's always a potential lag between the cost impact you have you have and potentially your ability to price to that. And then product mix. I would tell you for an example, if you look at the motorized segment, our inability to ship Class A product to the level that we desire, almost exclusively related to supply chain constraints, is probably benefiting our gross margin performance in that business from a yield standpoint. Class A products are inherently for us not as profitable as Class B products, as one example. And so as that Class A business hopefully begins to come back with less constraints at assembly in the next two to three quarters, you may see a mixed impact due to some shifts there. But I believe you are seeing a trend on profitability, Mike, that we believe is sustainable. But as we've talked, the environment is still dynamic enough that no two quarters are identically alike. They just aren't right now. And so I guess that's what we can share with you this morning.

That's very helpful. Thank you for that. And then just maybe from the consumer demand standpoint, a lot of the talk is first time in younger buyers getting into the market since the pandemic. Maybe give us a sense of if you're seeing any changes in that profile, if you're seeing any changes in retail mix, what's selling maybe versus what was selling last year.

Yeah, I'm actually going to pull out the retail report from last week. And while I won't share it specifically with you, I will tell you that, as I mentioned in our prepared remarks, that overall retail momentum continues to be very positive for our business. And from a mixed standpoint, both at the consumer level and at the product level, I would say two themes continue to be present. One is we are seeing more families shopping for RVs from a consumer standpoint. And certainly the diversity of those families is something that we've noted as well. And number two, there is a trend towards smaller products, both on the motorized side and on the towable side. And so Class B and Class C and certainly travel trailers continue to be hot. So Mike, we are not seeing dramatic shifts from last summer, last fall in terms of product categories or consumers. And we are hearing, as of March 24th, no real high alarm bells yet from our dealers about the dilution of first-time buyers in the lifestyle yet. In fact, because the pandemic conditions continue to be inconsistent across the country with the variants and the state of sort of lockdown or restrictions on leisure options is also inconsistently present, We believe a lot of those first-time buyers from 2020 are actually excited about using their products again in 2021. So no real changes.

Okay, great. Thanks a lot.

Thank you. Our next question comes from Brett Andres with KeyBank.

Hey, good morning. Mike, if you could break out that retail report again. I'm curious what you're seeing with pre-sales or deposits. I mean, have you seen any shifts recently in the consumer's propensity to put money down and wait for a unit? Is that still there?

Brent, good morning. That behavior is definitely still present, and I believe you saw some of that Over the winter months, with low inventory in the field, we do have consumers who are getting in line still for products that are yet to be delivered to the actual dealers. The percentage of pre-sold or retail sold units varies by brand and candidly by dealer strategy as well, based on how they approach their own marketplaces. So we are seeing that behavior. The other thing we've been encouraged by in speaking with our retail financing lenders is that consumer credit remains very stable. In fact, a couple of them have commented that it has even strengthened a little bit here as of late. And so we are seeing no decline on either the consumer credit side or wholesale financing. In fact, the dealers have very strong cash flow right now Because of their inventory levels, they're not using as high a percentage of the banking credit lines that they've utilized in the past. And so the consumers who do want to come in and either buy a unit that's on the lot or put a deposit down and qualify for a unit to be delivered later, the conditions are very favorable right now for them to be able to do that.

Got it. That's a helpful color. Thank you. And then my follow-up is a little bit more of a, a hypothetical, so I apologize for that, but do you think that Winnebago or the industry has enough inventory or production capacity to positively comp retail in your fiscal fourth quarter if demand is there? I'm just trying to frame up how things could look if demand holds up, if that makes sense.

I understand the question, and we may have inferred in some of our comments that the fourth calendar, really the September through December 2020 period was very strong at retail. And we anticipate that comping aggressively in a positive fashion against those numbers in the same period in 2021 will definitely be a challenge. I think that will vary by brand and by category. And to your point, do we have lower inventory levels this year than last year? I'd have to go back and look at the numbers. I think we did pretty strong retail a year ago. on crashing field inventory levels. That really was part of the reason why the inventory levels got depleted. And so my gut is telling me that the field inventory levels would probably be strong enough this calendar fourth quarter to take a run at those numbers. But I think it will also depend on other conditions around consumer confidence and the state of the virus and all of that. But that's why we're signaling that we believe you're going to see pretty strong retail comps and shipment comps, candidly, probably in the next three to four months. And then you will start to see those numbers change as we're going up against record retail and increasing wholesale shipments from a year ago in the back four or five months of the year. Those numbers that we'll start to see comp-wise in the back half of the year will not mean, hopefully, that the industry is struggling or in retreat, it just means we have a very unusual comp condition that we're up against. But as I said, we believe retail conditions are favorable for the foreseeable future, and we believe wholesale conditions for our business are favorable through fiscal year 2022 to get to normalized dealer inventory levels.

All right. Thank you. Appreciate it.

Thank you. Our next question comes from Fred Weidman with Wolf Research.

Hey, guys. Good morning. Mike, I just wanted to dig into the updated retail outlook for the fiscal year. You know, given everything that you've seen from SSI and the retail commentary through early March, I mean, everything seems directionally good. Is that improved outlook a sort of up mid to high single digits reflective of that strong performance to date? Are you actually more optimistic as you look ahead to some of these tougher compares down the road? Is there some conservatism still baked into that outlook? It'd be really helpful to sort of get your take on what is encompassed in that mid to high single-digit outlook.

Yeah, absolutely. I'll give Steve Stuber a lot of credit here, but Steve maintains our internal forecasting models within the company And we run those out by brand, by product, and by month, by year, not just for this year, but for several years into the future. And with his leadership, as we've studied the models, the forecast that we gave you today is reflective of our performance fiscal year to date and what we think will happen in the next six months of our fiscal year, March through August. If I had to be a betting person today, I would tell you that I think that retail estimate is probably trending towards the higher side of our comment this morning. So we said mid to high single digits. That's probably in the high single digits as a trend right now. Could that climb even further? We'll see as the spring and the summer gets rolling here. So I hope it's conservative. We certainly don't want to be too optimistic or too pessimistic, so we always try to play it relatively down the middle, but I would lean towards the higher side of that retail forecast for the rest of our fiscal year.

Perfect. Super helpful. And then just on the leverage on the balance sheet today, you guys are basically at the low end of your target. You touched on some of the capacity expansion efforts that you guys are investing in, but you do have a fair amount of access to cash. Can you sort of walk through how aggressive you think you could get? You guys have exceeded the high end of that range in the past. I mean, is that something that given the strong backdrop and forward outlook that you have, you might look to explore again? Any color there would be helpful.

Yeah, this is Brian. I'll take that one. As I mentioned in my comments, it certainly is an important part of our capital allocation strategy is to evaluate those strategic opportunities to grow the portfolio and we will certainly do that. We have said historically that we would spike it to as much as 3.0, our leverage ratio that is, to 3.0 for the right deal at the right time. I don't know that that's changed meaningfully. We'll continue to evaluate what our opportunities are. If there is a specific opportunity that we think represents a less cyclical or even counter cyclical opportunity in a lower risk environment. We might even consider going above that 3.0 for that special opportunity. But for now, we really haven't adjusted our capital allocation strategy. We're still speaking to it as aggressively pursuing the opportunities that we feel are a good strategic fit and allowing ourselves to you know, the flexibility to spike it to as much as 3.0 for that right deal.

Great. Thanks, guys.

Thank you. Our next question comes from Barrett Jordan with Jefferies.

Good morning. This is Mark Jordan. I'm for Barrett. We had a few questions on pricing this morning, and I may have missed it, but are you able to break out what portion of the pricing improvement in the quarter was driven by maybe product mix and innovation and what might have been driven by the lower discounts and allowances?

Yeah, we did not disclose that level of detail. Certainly, it was favorable to our margin story. and in a meaningful way. We cite both the price and the dealers, but then also as part of that equation, the lower allowances and discounts that are necessary to move the product. So both are contributing to our top line as well as our margin story in the quarter.

Okay. And I guess to follow up on the earlier question on first-time buyers and maybe the recent surge in buyers in general, do you have any thoughts on how the current vaccine rollout might impact demand and maybe how sticky these buyers might be. I mean, should we expect to see these customers enter maybe the typical three- to five-year trade-in, trade-up cycle, maybe to larger units as they're maybe smaller right now?

Yeah, I think we had a quote in our press release this morning that talked about our belief that the pandemic has actually initiated an acceleration of what we believe was already there, which is sort of secular growing popularity in really a lot of outdoor categories, power sports, marine, RV, you name it. And we believe that consumer priorities have changed, both in terms of their desire to invest in experiences versus solely sort of possessions as a gauge of quality of life or happiness. But we also believe, you know, the time recently with family and friends has reinforced that they'd like to do more of that in the future. And families and individuals will be reevaluating, you know, how they, you know, spend their leisure time going forward. And so for those reasons, and a lot of the research that we see from many third-party sources validates this, is that the interest in camping and the outdoors and and traveling and seeing the country, combined with the use case expansion of products in the RV lifestyle especially, and even a bit in the marine lifestyle, pontoons is a good example of that, those combinations are really leading to popularity being sustained, we believe, in terms of consumer demand for our products. So again, we are optimistic about consumer demand conditions for the foreseeable future. We certainly understand the realities of operating in a cyclical industry and in very dynamic times. So we will always monitor what we believe those consumer sentiments are. But we do believe that that popularity will continue to increase. In terms of upgrading, we are too early in this sort of pandemic, post-pandemic cycle to understand if upgrading rhythms are going to change either in terms of timing or types of products. We're just too early. I will note that one of the impacts of that will also most likely be for towables products, the products that they're using to tow. There's an awful lot of activity going on in the auto sector around, you know, the move to electrification around different platforms. And we believe that consumers will have to adjust at some point to new products that will end up towing a lot of our travel trailers and fifth wheels. So all of those factors, we believe, will combine to influence upgrade cycles going forward.

Great. Thank you very much.

Our next question comes from David Whiston with Morning Star.

Thanks. Good morning. I wanted to go back to the supply chain issues. As I'm sure you know, on the light vehicle side, there's the semiconductor issue you mentioned, but also foam after the storms in Texas has been a problem. And I'm just curious, I know you said it's not impacting chassis supply, but what about making the interiors of your vehicles or any kind of electronics in the interior of your vehicles? Do you have any Have you experienced any shortages in that regard, or do you think you will in a few quarters?

Yeah, good morning, David. We have experienced component challenges regarding interior parts. And you mentioned one that in seat cushion foam that is related to a particular chemical in the manufacturing process for those products. And we are managing that. We are also managing... other types of chemicals that are important in fiberglass manufacturing. But the supply chain constraints have really been varied across the board. I mean, they're everything from furniture to electronics to awnings to other components within the products. We've recently seen some pressure on generators and are working with those suppliers as well. So if you saw sort of the comprehensive supply chain health status dashboard that Brian and I look at on a regular basis, the list of component categories is meaningful, and the constantly red, yellow, green status within those categories is pretty dynamic. So, yeah, it is not just external or foundational components. It is some of the interior components as well. We don't believe that the hangover from the winter storms in Texas will specifically impact our business for a long time, but those did and are having a bit of an influence, certainly on sort of the chemical or resin-based components that we have in our products today.

Do you get any indication – you mentioned your good relationship with the suppliers earlier. Do you get any indication that – the light vehicle industry serving the GM4 Toyotas of the world gets priority over the RV industry, or is it all parity?

I would not describe it as parity. I mean, certainly each of the chassis manufacturers operate with their own set of priorities within their businesses, and I won't get into the dirty laundry of some of the discussions with those suppliers out of respect for their strategies and but each chassis manufacturer usually separates its commercial slash specialty vehicle chassis platforms into another division that isn't directly embedded in the passenger vehicle business. But they are constantly in communication, it appears, as to the allocation of manufacturing capacity and engineering resources and capital in terms of manufacturing. So yes, it is a discussion we have often in terms of can the chassis manufacturers keep up with what has been very strong demand on the commercial side as they're also managing the technology transition to, in many cases, all electric, that seems to be starting a lot with passenger vehicles. So those multi-generational product plans from the chassis suppliers do definitely vary.

Okay, and given backlog is skyrocketing up and inventory dealerships are going down, can you talk at all about what percent of your RV operations are at three shifts, if any?

So David, we have operations in Iowa, in Indiana, and in Florida across our portfolio. And in each of those locations, we have different manufacturing strategies in terms of labor, the number of shifts. We often run our vertical manufacturing processes with either more overtime or second shifts versus our assembly processes. Specifically, the LCART county labor culture and ecosystem for RV assembly has not done a lot of second shifts for reasons specific to that area in terms of labor profile. But in other parts of our business, more so in the verticals, we do see second shifts in order to allow us to keep up for demand. So it varies. It's It's not something we deploy regularly across all of our businesses. And to be very candid with you, the supply chain constraints are real enough that the opportunity to add second shifts and have steady component supply for a second shift is pretty limited right now within our business anyway.

No, that's helpful. Appreciate that. It's really different from the light vehicle industry, so that's good to hear, or interesting to hear, I should say. Just one final question for me on buybacks. The stock's been on a tear, getting into the high 80s recently. Looks like buybacks slowed in Q2 versus fiscal Q1. How does the stock being on a tear like this impact your decision to do or not do buybacks?

You know, David, this is Brian. You know, it's certainly one factor that all companies are going to consider in terms of their current stock price. You know, from our perspective, certainly also influencing it is our view of how otherwise we might allocate that capital. And as we talked about earlier, we've got some capital expansions that Mike referred to in his comments that are certainly a priority. In other words, feeding new organic growth. As well, as we mentioned, the opportunities to grow strategically the portfolio through M&A. And so those are also factors that were certainly weighed as we navigated through Q2. And so to the point of your question, yeah, the stock price is one factor. It's certainly not the prevailing or only factor that we would consider in weighing whether share repurchase is the appropriate step to take at that time.

Okay, thank you.

Thank you.

Thank you. Our next question comes from Sean Collings with Citigroup. Great, thank you.

Good morning, Mike, Brian, and Steve. Hope you guys are well.

Thank you.

Hey, my question is on consumer demand and interest rates. As interest rates potentially rise, do you expect any material impact, and can you estimate how industry-wide, how much of an RV is financed by a consumer loan? Rates are obviously still very low historically, but any color on how you size this macroeconomic factor up would be interesting. Thank you.

Great question. We are tracking very carefully several external factors not within our control. Interest rates are certainly one of them that we'll watch carefully as we've talked inflation The price of gasoline has always been something the industry's watched it probably impacts usage more than it does purchases so we're watching all of those as you know so-called experts are hypothesizing about the prospects of rising interest rates and gasoline prices and and a potential inflationary environment ahead Historically There is some connection, definitely, to interest rate percentages at a gross level and their impact on consumers' appetite to buy a product. Now, we've been fortunate in the last, you know, now almost 12, 13 years, interest rates have been at, you know, over a 50-, 60-year period, they've been at historically low levels. And so the context of rising interest rates is definitely different today than it was in the late 70s, early 80s. But we believe any uptick in interest rates or gasoline prices is probably not a positive perception, but it does not necessarily mean that retail or consumer demand will be derailed. We believe that consumer demand is strong enough right now to withstand some elasticity in pricing, in gasoline, and in interest rates. You know, the percentage of vehicles or RVs financed at retail varies, you know, based on the price of the unit or the type of the unit. Anywhere from 40 to 60 percent of the units are often said to be financed at retail. But that number is ultimately hard to see because Consumers may actually walk into their dealers with a loan from a credit union or a line of credit that they secured in another fashion. And so again, we think it's a majority of units that are usually subsidized or financed through some debt mechanism. But it's difficult to see. Almost always, there's a down payment at the dealership that's required or with the retail lender to get into that product initially. But again, as we said in our earlier Q&A comments, the retail financing environment today appears very healthy, very stable, and we think that's a tailwind for our business in the future.

Great. That makes a lot of sense, and it's helpful. Mike, thank you for the time and insight.

Thank you. Our last question comes from James Hardiman with Wetbush Securities.

Hey, good morning, guys. Great quarter. And I apologize in advance for harping on sort of the retail guide as if you guys have a crystal ball. But I think people are starting to do the math. And just, you know, if we think about what looks like 30% plus retail growth in your fiscal year today so far, and I think, you know, given the easier comparisons, it sounds like if anything, that's probably going to accelerate in your third quarter. As I think about your fourth quarter, right, and I get that comparisons get pretty wacky here, not only does sort of mid to high single digits imply a pretty big collapse in that fourth quarter, but it seems like it's about flat with 2019 levels. So, you know, putting all that math aside, I just, just qualitatively, right, given that last year was an unusual year, what's your level of confidence that, will comp positively versus 2019 once we get sort of past a lot of these, the early part of the pandemic. Because I think it speaks to sort of the sustainability as, you know, you've talked about a lot of these secular trends coming out of the pandemic.

Yeah, it's an excellent question. And we respect that, as you said, you know, a lot of people are going to do the math. We are certainly optimistic or hopeful that the retail trends are even stronger than we offered to you this morning in terms of the rest of our fiscal year. Now, recall that we were talking industry retail for the fiscal year, not Winnebago Industries retail. We have continued to gain market share, and so our own retail performance, and you can do the math, between quarter one and quarter two with the shipments in the field inventory, you know, continues to remain strong and in most cases running above the industry retail rate. James, I have not done the comparisons here recently to 2019. With all due respect, we've sometimes been trying to kind of see the nose in front of our face in the fog of, you know, a very dynamic environment. You know, we do believe that the industry over time, under stable, healthy macroeconomic conditions, has the ability to continue to become more popular. It wasn't too long ago when the number of RVs in the hands of consumers in total was somewhere in the 9.5 to 10 million unit range in terms of total ownership. And that number has elevated, I believe now, to 11 million plus. So not only are more RVs being sold more consistently in healthy environments, but it appears that consumers are sticking with those products as well. One of the things that we will be doing in the future to reach more consumers is making sure that our business model is in touch with new ways consumers want to experience the lifestyle. Peer-to-peer sharing platforms, rental platforms, direct consumer lead generation. There's a lot of different things our teams are working on that you'll hear more from us in the future that we believe will allow us to get to a lot of consumers in the last 24 months that have experimented or tried Arvene, but have not yet potentially made the decision to purchase one. So I apologize, I can't give you a 2021 to 2019 comparison right now, but it's a fair question.

Yeah, let me pile onto that a little bit, James, if I may. Because it's been a couple of people that I've asked this question, and I don't think we mean to infer at all that we're becoming a little bit bearish in Q4, as you might run your numbers. as to how we feel about the sustainability of the retail poll. There's certainly, and one of the questions asked about the vaccines and the impact that that has, and there's this hypothesis out there that safety of RV travel being a tailwind, I think we can all agree over the past year, will wane over time. Some of that may. right? I think we can all agree that as the vaccinations roll out, that maybe that desire for a safe place to travel might wane a little bit versus what it's been this past year. More importantly, we think in terms of our reason for our bullish outlook is the flexibility that people should have going forward versus the historical flexibility. I think we can all agree that the workplace flexibility and even educational flexibility that has been introduced or even forced onto the workplace environment this past year has stickiness to it and that the expectation going forward by employees will be for more flexibility and certainly all of us on this call all attended virtually and the experiences we've all had working virtually this past year adds to that flexibility where people now realize they can work from the road and we think that that flexibility that's been introduced is sticky that will endure and And along with that becomes this expansion in use case. And Mike referred to that earlier, this continuing expansion of use case where people can use RVs more frequently or more often and in more ways. And that is a reason for industry bullishness that will certainly prevail, we feel, in the long term here, more so than just this near-term safety that it provides, there's this flexibility that will lead to greater use case, greater penetration in U.S. households, et cetera. So I'll just add that on for your consideration, too.

That's really helpful. Perfect. Mike, Brian, Steve, thanks for all the color. Thanks, James.

Thank you. And I don't see any further questions in the queue. You may continue with any final remarks.

Thank you, operator, and thank you, everyone, for joining us today. We really appreciate your time, and we're looking forward to talking to many of you in the very near future. Thanks again.

Thank you for your participation in today's conference, and you may now disconnect. Have a wonderful day.