Winnebago Industries Inc

NYSE:WGO

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the First Quarter 2019 Winnebago’s 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 call will be recorded.

I would now like to introduce your host for today’s conference, Mr. Steve Stuber, Director of Financial Planning and Analysis and Investor Relations. You may begin.

[Steve Stuber]

Good morning, everyone. And thank you for joining us today to discuss our first quarter earnings results. I am joined on the call today by Michael Happe, President and Chief Executive Officer; and Bryan Hughes, 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 first quarter results was issued and posted to our website earlier this morning.

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 Happe. Mike?

[Michael Happe, President and Chief Executive Officer]

Thank you, Steve. And good morning to everyone on today's call. We are sincerely grateful for your time and for your interest in Winnebago Industries.

We will begin this morning’s discussion with an overview of our fiscal year 2019 first quarter results and a brief perspective on the balance of the year. I’ll then turn the call over to our Chief Financial Officer, Bryan Hughes who will provide more detail on our financial results. I will then return with closing comments and as always, we will end this morning’s call with a Q&A session.

As fiscal year 2019 kicked off in late August of this past summer, we had just completed a successful fiscal 2018 year, a year in which Winnebago Industries surpassed $2 billion of net revenues for the first time in company history.

North American RV market share had risen to approximately 8.5% and we completed the acquisition of Chris-Craft, one of the world’s finest luxury boat brands in an intentional effort to diversify to new outdoor lifestyle arenas. It was a good year.

We now look to 2019 and this fiscal year for more of the same. Sales results that surpassed those of the industries we compete in, a focus on driving higher levels of profitability and asset utilization, and an appetite to grow in new ways that position Winnebago Industries and its brands for sustained future success. We are pleased with the results from the first quarter of this new 2019 year.

Consolidated first quarter revenues were up almost 10% for the period with top-line growth being driven by the popularity of our products across the Towables segment.

We are pleased that Winnebago Industries’ overall revenues continue to grow organically and at a healthy pace at a time when the RV industry is working to normalize its overall field inventory levels in relation to a more moderate retail pace. In addition, we have made material progress in increasing our profitability.

Consolidated gross profit margin increased 40 basis points in the quarter driven by favorable business mix due to continued growth in our towable segment and improved margins in our motorized segment. Given the solid top-line growth, coupled with margin expansion and improved operational discipline, cash flows remains strong growing 84% over last year and we were able to reduce debt by $38 million during the quarter.

Now, turning to the segments in more detail, on the towable side; revenues for the quarter were up 13% over fiscal 2018 leading to continued market share gains for both our Grand Design branded and Winnebago branded RV businesses. Our ability to outpace the industry in terms of unit shipment and retail growth is clear affirmation of the robust appeal of both our Towables brands across a broad customer base.

Adjusted EBITDA margins did decrease 240 basis points though in the Towables segment largely reflecting the strong comparable period in the year prior, an increasingly competitive market, and continued cost input pressures.

Towables’ backlog levels remained extremely healthy at over 9000 units for the quarter, but declined 3.9% in dollars versus the prior year reflecting unusually high backlog levels last year in Q1 and the benefits of the increased capacity we brought online during the course of calendar year 2018.

We are very comfortable that our current Towables’ backlog is in line with internal growth projections we have for the remainder of the fiscal 2019 year.

Overall, we continue to be exceptionally confident in the growing strength of our dual branded Towables lineup. This strategy was on full display at our recent Open House event where we introduced our completely revamped Winnebago branded Spyder Toy Hauler, and the Micro Minnie Lightweight 5th Wheel which have unique appeal with smaller truck owners.

Additionally, on the Grand Design business, we launched a Momentum branded Toy Hauler in a travel trailer format and introduced the popular Solitude 5th Wheel in a smaller S Class. Since the unveiling of these new products, we’ve seen strong early order momentum and believe they will contribute to continued growth going forward.

Moving now to the Motorized segment, we have continued to advance our efforts to both strengthen our motorized product lineup and improved profitability within the business. While revenues were down modestly, 3.6% versus the prior year, we believe the wholesale sales pace actually exceeded that of the industry in the Q1 period.

We also continued our progress to expand gross margins as efforts to implement operational improvements, manage cost input pressures, and the favorable mix related to a strong Class B quarter, all factored to yield strong results.

As a result, adjusted EBITDA margins for the Motorized segment increased 400 basis points over the prior year restoring both sales and profitability momentum in the Motorized business on a consistent basis remains a top priority for us and we continued to dedicate a considerable amount of energy and resources to this effort.

Talent, products, systems and processes are all being worked on. Key to this effort in the future will be continued new product development that improves our standing with the motorized dealer base and produces stronger retail results and turns for our channel partners.

Within the quarter, we successfully unveiled at the Open House event our new Class C Vita and Porto diesel models on the Mercedes Sprinter chassis, as well as our new Adventurer Class A gas model. These are important steps, but not the only ones that we will take in fiscal year 2019 to stabilize our Class A and Class C categories.

The Motorized backlog declined 24% in dollars from the prior year. Three elements are to be considered in the comparison versus a year ago. First, fall of 2017 saw a positive but abnormally high number of new products introduced in the Motorhome business, particularly the product brands Intent, Revel, and Horizon. We did not have the same level of new product orders this fall.

Second, rental orders into the Motorhome business this first quarter are a bit delayed versus a year ago due to retail channel decisions, but we are pleased with the incremental share progress our motorized team is making in this channel.

And third, the market conditions for Motorhome shipments into the channel are indeed tougher than a year ago, particularly in light of strong competitive brand destocking behavior by many of our dealers.

Lastly, we are seeing the benefit of a full quarter of Chris-Craft’s marine sales within our financials. We are pleased with the integration of this brand into our portfolio of outdoor lifestyle products, the Chris-Craft team has had a tremendous summer and fall, especially telling the introduction of two new models, the 28 and 35 Launch GT boats.

Both have received tremendous reviews from the dealer community and the boating industry trade press. Chris-Craft’s sales in the first quarter were strongly positive in shipments and retail versus the same period a year ago and they are performing on pace with the financial plan we modeled for the first full fiscal year within Winnebago Industries.

With that overview, I will now turn the call to Bryan Hughes to review our fiscal 2019 first quarter financials in more detail. Bryan?

[Bryan Hughes, Vice President and Chief Financial Officer]

Thanks, Mike, and good morning, everyone. First quarter consolidated revenues were $494 million, an increase of 10% compared to $450 million for the fiscal 2018 period driven primarily by another strong quarter of strong organic growth from the Towables segment and further enhanced by the acquisition of Chris-Craft.

Gross profit was $71 million, an increase of 13% compared to $63 million for the fiscal 2018 period. Gross profit margin increased 40 basis points in the quarter, driven by favorable business mix, due to continued growth in our Towable segment, and improved margins in our Motorized segment courtesy of pricing that has been implemented over the past year and also through operational improvements.

Selling, general and administrative expenses increased 21% reflecting ongoing investments in talent as we build our capabilities to effectively operate our growing portfolio of outdoor lifestyle businesses and introduced best-in-class functional processes.

We also continued to make strategic investments to further our profitable growth and appropriately resource the transformational journey that we are on and in the case of first quarter, we undertook a couple of strategic initiatives whereby we engaged outside professional services firms to supplement our internal capabilities, the cost of which were into the seven figures.

We are pleased with their progress and we feel confident in the strategic merits of each of these projects. Even after including these incremental investments, first quarter operating income was $33 million, an increase of 5% compared to $32 million in the first quarter of last year.

Net income was $22 million, an increase of 23% and earnings per diluted share were $0.70 per share, an increase of 23% over the same period last year.

We have provided non-GAAP EBITDA and adjusted EBITDA performance measures in our press release as a comparable measure to clearly illustrate our performance. The schedules accompanying the press release show a reconciliation between net income and adjusted EBITDA.

Consolidated adjusted EBITDA was $39 million for the quarter, compared to $35 million last year, an increase of 9%.

Now, turning to the individual segments and starting with the Towable segment, revenues for the first quarter were $293 million, up 13% year-over-year driven by continued growth across the Grand-Design RV portfolio. Segment-adjusted EBITDA for the first quarter was $31 million, down 8% from the prior year and adjusted EBITDA margins decreased 240 basis points reflecting continued cost input pressures in a highly competitive market from a discounting perspective.

These cost input pressures have not yet been fully offset by further pricing increases which all anticipated in the coming quarters.

Turning now to the Motorized segment, Motorized revenues were $181 million for the quarter, down 4% versus last year. While we continued to experience growth and market share gains in our Class B lineup driven by the success of the Revel and Travato product lineup, this growth was more than offset by declines in our Class A and Class C products driven primarily by industry trends in these two classes and also comparing against the pipeline fill we had last year on the launch of the Class A gas Intent product.

Segment-adjusted EBITDA was $12 million for the first quarter, up 144% year-over-year. Adjusted EBITDA margin increased by 400 basis points, primarily driven by the success of the Class B products, operational improvements in both northern Iowa and West Coast facilities, as well as cost input pressures being mitigated by fiscal 2018 price increases.

Turning to our balance sheet, as of the end of the first quarter, the company had outstanding debt of $253 million comprised of $260 million of debt net of debt issuance cost of $7 million. Working capital was $144 million. Our current net debt to adjusted EBITDA ratio was 1.4 times which is once again within our targeted leverage ratio range of 0.9 to 1.5 times.

Cash flow from operations was $54 million for the quarter, up $25 million from last year driven by strong growth in net income and favorable changes in our working capital. The combined strength of our balance sheet and cash flow provides us tremendous flexibility as we continue to invest in the business and execute our strategic transformation initiatives.

The effective income tax rate for the first quarter was 23.3%, compared to 32.3% for the same period in fiscal 2018. The favorable decrease in rates of 900 basis points is driven by the impact of the Tax Cut and Jobs Act.

Finally, our Board of Directors approved a quarterly cash dividend of $0.11 per share, payable on January 23, 2019 to common stockholders of record as at the close of business on January 9, 2019. This increases Winnebago’s annualized dividend rate to $0.44 per share and represents an increase of 10% over the previous annual dividend of $0.40 per share.

We believe this to be a meaningful increase that demonstrates our confidence in both current results and future growth opportunities.

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. Mike?

[Michael Happe, President and Chief Executive Officer]

Thanks, Bryan. As we have stated several times this morning, we are pleased with the positive start to our fiscal year 2019. Our teams are working extremely hard to ensure that we deliver high-quality, fast turning profitable products in a responsible manner to our channel partners. Our RV and Marine dealers trust our company’s commitment to building reliable and durable products as demonstrated by our low and stable warranty rates and our industry-leading legacy of aftermarket parts and service support.

This focus on quality, service and innovation continues to resonate as a differentiator within our markets. It goes without saying that these are dynamic times within our business internally and externally. First some comments on our continued internal transformation.

In January of 2019, it will have been three years since I have the privilege to join this storied organization and contribute to our journey to good to great. In short order, we, as a complete Winnebago Industries team have created an energizing vision around becoming a trusted outdoor lifestyle solutions leader strengthened our core RV business, initiated a more diversified portfolio of revenue streams, made positive progress on cultural and operational improvement initiatives, and delivered consistently stronger financial results which reflect a healthy and more resilient company.

We highly value the assets that are our people, our brands and our strategic external partnerships. We remain committed to reaching the long range goals laid out in our November 2017 Investor Day presentation even as some of the market headwinds that are blowing make a few of those goals a little bit more difficult.

Regardless, we will tack against the winds to find a net positive path to achieving our potential and delivering value to our shareholders. We now have a more diversified business platform to grow from than ever before with active RV Marine and specialty vehicle operations.

From an opportunity standpoint, we have significant share expansion potential in each of those global markets in the next five to ten years and we remain on the search for premium companies with strong brands that deliver on the product and service promises they make.

Many of you are understandably wondering about our view on the state of the overall economy, the North American RV industry and its prospects in the next year or two, and the potential impact of those two subjects on our business. I will address each of those now.

It is truly a more noisy and mixed macroeconomic environment. There remain however still many positive signs about further sustained economic growth. Fuel and oil prices remain extremely reasonable which is a strong positive for our businesses. Consumer confidence while settling a bit remains actually quite stable in the midst of gloomy headlines.

Inventory and retail finance companies are rational and are not abnormally constraining credit availability nor offering risky financing packages to dealers or end-customers. Our customers appear to still be spending money on holiday presence, enjoying experiences at restaurants with their families and friends and investing their valuable discretionary time in the outdoors creating and collecting outdoor experiences.

However, we also recognize that there are legitimate macroeconomic headwinds. The impact of tariffs and material cost increases are real for most terrible good businesses and have resulted in higher prices at retail on RVs and boats year-over-year. The recent increases of the Federal Funds rate have gained incredible attention and slightly impacted the monthly cost of financing for many end-customers.

The volatility of the equities market and the slowing, however temporary of the growing wealth effect in the U.S. have made some consumers more cautious in general about near-term discretionary purchases and we are still dealing with the uncertainty of the past mid-term election results in the U.S. and our country’s ability to create constructive compromise and policy both domestically and globally going forward.

Net, net, we still have hope in the ability of the North American economies to drive positive GDP growth in the next twelve months but recognize that this macroeconomic environment is much choppier than in the past several years.

While sentiment in the broader RV market has been somewhat skittish slightly, we remain optimistic about the long-term retail prospects for the RV industry. In the short-term, concerns about elevated levels of dealer inventories appear to be lessening with each passing month. We have been very clear in our previous statements that the dealer inventories of Winnebago Industries’ respective RV segments have remained in the comfort zones of turns, dollars and aging units that we monitor carefully.

Have we been impacted a bit by the overstocking of other RV brands at dealerships? Yes, but our teams have been appropriately working with many of those dealers to ensure that we are a good partner and deliver high-quality products when the dealers are ready.

We are also aware of the RV Industry Association’s latest wholesale shipment forecast for calendar year 2019 and think their upside/downside range is reasonable. The real question is where the industry retail number will stabilize in the spring of 2019.

Flat retail for the whole of the calendar year 2019 is a good aspirational target for the industry but we also admit that due to the volatility of the external environment, there could be a margin of error that is either slightly positive to low-single-digit negative.

A reminder that on a trailing three, six and twelve month basis, Winnebago Industries’ consolidated RV retail has been running 15 to 20 points higher than the industry results. It will be a challenge to sustain that spread into the future, but we are confident we will continue to perform at an accretive retail pace versus the industry pace.

What is important for our shareholders to know is that we at Winnebago Industries are extremely focused internally on managing what we can control, that is our production rates, and our highly variable cost structure.

We also won’t forego the opportunity or even obligation to smartly invest or pursue what we deem to be strongly strategic long-term growth opportunities, but we will manage the core organic businesses very intentionally and careful during these uncertain times.

We are not projecting an RV industry shipment regression in calendar year 2019 that comes anywhere close to the historical RV downturn averages of the past 40 or 50 years. In fact, as our Q1 sales and results demonstrated, we at Winnebago are still focused on driving accretive growth to the industry in sales, and EPS for as long as market conditions allow.

Looking ahead to the balance of fiscal year 2019, Winnebago Industries is in good shape to continue outpacing the RV and Marine industry in terms of top-line sales at both the wholesale and retail levels and drive improving profit performance from a yield standpoint.

We think our track record of doing what we said we will do in the last three years has improved significantly and we are committed to be a high-quality, well-managed company that investors can place their trust in.

With that, I will wrap up our comments for this morning. We would like to end by thanking all of our Winnebago Industries’ employees for their hard work during the quarter and for their continued dedication to providing our customers with high-quality products and services and we wish all of our employees, channel partners, strategic external partners and all of you on the call a happy holidays and a safe holiday season.

Thanks very much for your time today. I will now turn the line back over to the operator to begin the question-and-answer session.

[Operator]

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

[Craig Kennison, Robert W. Baird & Co.]

Hey, good morning. Thank you for taking my questions. I wanted to start, Bryan, with a question for you. I believe you mentioned discounting in your prepared remarks. It’s my impression that Grand Design does not offer discounts. Could you just clarify those remarks for us?

[Bryan Hughes, Vice President and Chief Financial Officer]

Yes, that’s right, Craig. The discounting that we saw in the quarter was more focused on the Winnebago branded Towables business. Grand Design by virtue of the strength of that brand, the strength of their momentum does not find themselves in the same situation as our evolving Winnebago branded business. And so, those comments were more directed or entirely directed to our Winnebago branded Towables business.

[Craig Kennison, Robert W. Baird & Co.]

Thanks. And then another detailed question on the rental market. I understand that it impacted results here. Could you help us understand the impact it had on units at the wholesale and retail levels during the quarter and whether you expect to get all of that back in future periods?

[Bryan Hughes, Vice President and Chief Financial Officer]

Yes, our current discussions with the rental companies are still evolving, Craig. We feel that they are going in the right direction or a positive direction just from an overall market share standpoint. But we did have a timing difference in terms of orders taken in Q1 this year versus where we were at last year.

And so, can’t quantify it specifically or choosing not to just for competitive reasons obviously. But we feel like we are heading in the right direction there.

[Craig Kennison, Robert W. Baird & Co.]

Thanks. And then, Mike, finally, I had a question on capital allocation. I believe there is $66 million remaining on the share repurchase authorization. So if my math works you could take that to zero and still be below two times on a debt-to-EBITDA ratio. What’s the Board’s thinking around the balance sheet and the ability to retire shares relative to other investment options you may have, I mean the stock really hasn’t been this cheap in a while.

[Michael Happe, President and Chief Executive Officer]

Yes, good morning, Craig. Thanks for the question and I will offer the opportunity to Bryan the weigh in here too potentially after my comments. The Board has – we are in constant discussions with the Board and specifically, the finance committee that we created within the Board structure couple of years ago now to discuss all of our capital allocation options and as we first shared at our Investor Day in the fall of 2017 and we stayed pretty disciplined to both the priority but also the sort of leverage ratio range in terms of our balance sheet in thinking about how we allocate capital. And we certainly have placed a priority on organic and inorganic growth strategies first and certainly are also mindful of the debt repayments of the existing debt we have on the balance sheet as another priority, always maintaining an eye on liquidity for the company especially in volatile times and that’s probably a more relevant topic here given some of the increasing volatility of the RV industry.

Certainly, other decisions in terms of the use of capital like, dividend payments to our shareholders and repurchasing stock are constantly weighed and assessed by Bryan and his Corporate Finance and Treasury team. And we are in good discussions with our Board about how many dollars to allocate to each of those investments.

Yes, the stock price is low, in fact, in our opinion, it continues to be extremely low versus our performance and that does weigh into the discussion we have around capital allocation on share repurchase options. But there are other elements that factor into where we ultimately put our dollars. And so, Bryan, I don’t know if you would add to that at all?

[Bryan Hughes, Vice President and Chief Financial Officer]

No, I think that covers it. The only priority that we laid out was specifically growth, deleverage/liquidity, return cash to shareholders. We conveyed our prioritization as such. And so, in the most recent quarter our initial target was again to focus on the growth to continue to provide the expansion that we committed to on the Towables businesses and the investments that we made there.

But then also to deleverage back into our targeted range of 0.9 to 1.5 which as I stated in my prepared remarks we accomplished in the quarter. So, I would just supplement Mike’s comments with that.

[Craig Kennison, Robert W. Baird & Co.]

Great. Thank you.

[Bryan Hughes, Vice President and Chief Financial Officer]

Thanks, Craig.

[Operator]

Thank you. Our next question comes from Scott Stember with CL King. Your line is open.

[Scott Stember, CL King]

Good morning, guys.

[Bryan Hughes, Vice President and Chief Financial Officer]

Good morning, Scott.

[Michael Happe, President and Chief Executive Officer]

Good morning, Scott.

[Scott Stember, CL King]

Maybe talk about – I know the backlog is down year-over-year, but obviously you guys had a bit more capacity this year. But if you flush out the backlog and you look at the incoming orders, it looks like it was a nice jump over the fourth quarter, at least from a sequential standpoint.

So, I think it’s clear that the orders are there. Can you maybe just talk about how that sets you up for the next, I guess, couple of quarters heading into the spring selling season from a growth perspective?

[Michael Happe, President and Chief Executive Officer]

Yes. Thanks, Scott, and good morning. Well, let me start with Towables first. That’s probably a more directly correlated answer in the sense that we do remain pleased with our towable backlog and as I said in my prepared statements, we stand today or at least at the end of the quarter at a little bit over 9000 gross units there and that is in line with the amount of backorders that we think at the end of Q1 is a good base as we began Q2 and go into the rest of the year.

And as you noted, we constantly have incoming orders from our dealers being generated by the respective towables businesses. And I do think we had a positive reception to the new products, as mentioned in our script as well, for both the Winnebago brand and the Grand Design brand at the September RV Open House event in Elkhart, and that certainly helped a little bit.

But I can’t put much more color on it than that we are comfortable with our Towables backlogs both in light of our own, I guess, future growth projections internally, but especially in light of the industry. And we’ve long maintained that backlogs in the RV industry are not always the best indicator of future performance, because there may be other dimensions to why the back orders are the way they are that would ultimately have an impact on whether you have positive or negative shipment growth in the future. But our Towables business backlogs we feel good about today.

The Motorized backlogs are a little bit more of a mixed story as Bryan talked about there are some timing on the order side related to some of our rentals business, we feel especially strong with the Class B side and even our Class C backorder – log has hung in there a bit even though if you look at our Q1 shipment performance there, you would – you might not guess that. Class A is where the majority of our backlog number for the Motorized segment regressed. And a good chunk of that is the absence of some of the new product orders that we took a year ago at the RV Open House in the fall of 2017. And so, the RV – the Motorized business continues to be in which we are making, we believe net positive progress, but it is, at times, not as consistent across the categories as we would like to see.

So I apologize for the rambling answer there. But, Towables backlogs we feel good about. Motorized backlogs, we feel good in Class B, a little bit better in Class C. Class A we have some work to do.

[Scott Stember, CL King]

All right. In regards to the Motorized side, very, very nice improvement in profitability there. Maybe just so, walk us through again, where you would expect ultimately the EBITDA levels of this segment to come out. I know that the last few quarters or going back a little bit more than that was a little more difficult given the lack of knowing where things were going to turn out, but clearly things are coming back here. Maybe just talk about where you think this could go?

[Michael Happe, President and Chief Executive Officer]

Yes, I’ll offer a comment and Bryan, please weigh in as necessary. Yes, we are pleased with the Motorhome profitability recovery in this quarter year-over-year versus Q1 of fiscal 2018 to be a bit fair. We probably dipped lower in Q1 of F 2018 than we should have. But it is good to see the Motorhome margins continue to sequentially improve, but also more importantly kind of improve year-over-year.

We do believe there is more runway there. I am going to be a little bit – I am going to hedge that comment just a bit for a couple of reasons. One is, the material cost environment continues to be a resistor of sorts to all of our RV businesses.

You saw some pressure on the towable side this quarter, particularly input cost that we just could not timing-wise, either drive out of the business or price out of the business. Motorized though has done a nice job.

We believe that this Motorized business should operate at a gross profit level in the low-teens and some day potentially in the mid-teens. Now that would be extremely high from a historical RV standpoint to be in the mid-teens gross profitability-wise with the Motorized business.

But that is our aspiration. The challenge is, is with the material cost environment and with the difficult shipment environment that we are now facing within the RV industries as dealers have tightened up on their inventory and when and how they take products, there will be some pressure points on Motorized margin going forward.

But we are pleased where we are at today. We would like to stay at that level and grow in the future than maybe a quarter-by-quarter story. But, I think there is still more runway for us to be more efficient, come out with new products that generate innovation and higher margin levels and that will be our objective over the next couple of years to keep improving.

[Scott Stember, CL King]

Great. And just last question, Bryan, you talked about on the operating cost side some cost for some outside boats that came in helping you with some of your initiatives. Maybe just talk about that a little more granular and how long these potential costs could stay on the books? And that’s all I have. Thanks.

[Bryan Hughes, Vice President and Chief Financial Officer]

Yes, as you know, Scott, and as we’ve talked about in the past, we are on a transformation journey. And so, from time-to-time, we are going to get some external help in that journey and supplement our internal resources accordingly.

I am not going to provide a lot of granularity to it for competitive reasons as you can appreciate. But these are projects we did incur in Q1. There might be a little bit of a tail as we head into Q2 here. But they were rather isolated as a Q1 initiative.

[Scott Stember, CL King]

Got it. That’s all I have. Thanks guys.

[Michael Happe, President and Chief Executive Officer]

Thanks, Scott.

[Operator]

Thank you. Our next question comes from Seth Woolf with Northcoast Research. Your line is open. ‘

[Seth Woolf, Northcoast Research]

Hey guys. Thanks for taking my questions and good job share gains in the quarter. So, just wanted to let that out there.

[Michael Happe, President and Chief Executive Officer]

Thank you, Seth.

[Seth Woolf, Northcoast Research]

Well deserved. So, just thinking about some of the comments you made, Mike, with respect to retail. I think you said that, flat retail in 2019 is going to be is a good aspirational target and there could be a little bit of downside.

So, the two questions I have with respect to that comment are, number one, at what point in the year once we start the winter shows, would you feel comfortable saying, hey, it’s going better than expected or it’s maybe flattish to aspirational.

When do you think you might have a sense for when we will have a better read on retail in 2019? And then, secondarily, if there is a little bit of margin for error and it comes in weaker than expected, what do you think a reasonable floor would be on retail declines next year. And then, at that floor, how should we think about Winnebago and Grand Design’s ability to outperform the rest of the market?

[Michael Happe, President and Chief Executive Officer]

Yes, good morning, Seth. Thanks for the questions. First, retail timing. I am sure other OEM leaders have their own opinions on timing. We are in a – we’ve talked about, especially with a lot of our investors lightly that this has been an industry certainly in transition from double-digit retail growth to single-digit retail growth and now in some of the recent months in which SSI has reported at least its initial monthly retail results.

You’ve seen the retail results dip to the negative side now for several straight months standalone. We have still, we believe some pretty tough comparisons from year ago on shipments in retail for the industry to comp against, probably between now and I would argue probably March, Seth, of this spring. But I think the December, January, February and even March SSI retail numbers will be very interesting for us to all see.

And by then, as you know, we will have the ability to go through several regional retail shows, plus many of the dealers and their own open houses on their lots and then we have the new RV Industry Association, RV X Event, I believe in the second week of March in Salt Lake. So, I would say, timing-wise, we should have a good read on sort of the market stabilizing around a new normal retail rate sometime in that March time period.

I think it could be difficult for us to produce positive comp numbers on shipments in retail as an industry before then. But I will stay back to your latter question that, Winnebago Industries and our brands we believe that we have the ability for at least the time being to continue outperforming the overall industry and as we’ve shown in some of our investor decks, our three month, six month and twelve month trailing retail performance has run anywhere between 15 to 20 points higher than the industry retail performance.

And a lot of that is certainly driven by the momentum that we have on the towable segment. So, it may be hard, Seth, for us to kind of maintain that retail performance gap at 15 to 20 points up, maybe that falls to 10, it points upward 15. We will see. But I think we can still continue to outperform.

And so, last question – or one of the questions you asked was is there a floor to our own retail thoughts. I just hesitate to answer that, because I – it would be purely a guess at this point. In my comments, I certainly did state that flat for calendar year 2019 would not be the worst result.

But depending on some of the other factors that are weighing on consumers’ minds, it could go up a point or two and it might go down more than that into the low-single-digit negative. And so, we will have to see is, as you all know there will be some news out of the Federal Reserve today on their interest rate decision and it’s almost a week-to-week conversation in terms of business performance these days.

[Seth Woolf, Northcoast Research]

Okay. Is it – if it drops next year and if it drops more, is it fair to think that it makes it harder for you guys to continue to outperform, I guess, that’s what I was getting at?

[Michael Happe, President and Chief Executive Officer]

No, I think we can continue to – especially, in our Towables businesses have above industry average performance. For some time into the future if we continue to be focused on making great products, working with our dealer partners in a trusting, caring way and providing great service to the channel and to our end-customers.

I think if we stick to our game plan, we have the ability to continue to take share in the Towables market and on the Motorized side, it’s more about finding consistent performance going forward. Month-to-month, we, sometimes on the Motorized side now see a shipment or a retail share increase, but the next month it could be given away.

And so, we are looking for consistency from our Motorized team now across their categories, not just in Class B where we’ve had really good success, but across their categories. So, that is a little more inconsistent.

But I believe we can continue to outperform the industry for the time being. How far the industry would potentially retrieve would definitely have an impact on how accretive our growth or EPS could be to previous year results. But we are not ready to get into that today.

[Seth Woolf, Northcoast Research]

Understood.

[Michael Happe, President and Chief Executive Officer]

We are more focused on Q2 now and executing our playbook.

[Seth Woolf, Northcoast Research]

That’s understood. I appreciate it. I guess, really quickly, Bryan, just thinking about the margins, excellent quarter out of the Motorhome business and it’s been a while. So, I guess, lot of that seems to be operational improvements. You guys talked about the different moving parts that are kind of working for and against the Motorhome business going forward.

As we go throughout the rest of the year, should we continue to think of this as a 5.5% to 6.5% EBITDA business even given the environment that we are in from a shipment perspective? And then, on the towable side, great share gains, but it looks like incremental margins were negative. How should we think about that going forward?

And then, you alluded to more price increases. It’s an environment where dealers are destocking, I mean, what kind of work to be guys done to make sure that it doesn’t have an overly adverse impact on retail sales, because I think that would be probably a headwind stuff there?

[Bryan Hughes, Vice President and Chief Financial Officer]

Yes, for sure. So, I’ll start with Motorhomes, Seth, and Mike already talked quite a bit about the Motorhome profitability. So I don’t want to spend too much time on it on top of what his earlier comments were. I will tell you though that the Motorhome team did a really good job with pricing. There was a few price increases that were done during our fiscal 2018 that are obviously benefitting the margin equation sitting here today. We had favorable mix from the Class B performance.

So those things are sustainable. I think we’ll continue to see good results from our Class B business. We had, as Mike alluded to, a low point in Q1 of last year where we had talked about the investments we were making in Forest City and new lines and bringing the Intent in the outlook up on a new line and the productivity took a hit in Q1 of last year. We are through that now for that sustainable.

And likewise, the West Coast challenges that we talked a lot about from Q1 of last year, we think have largely been addressed. Thanks to the excellent work by the team out there. They have done a phenomenal job of getting that business operating at a much better level. So, all those things point to sustainability, Seth, with where we are at right now.

So, we are going to continue to see cost pressures. We will see what happens with List 3 here that was scheduled to go in on January and I think everybody is wondering the timing is it a go or is it a no go. So, I hedge my comments only knowing that there is continued uncertainty as to the direction that the administration will take that and the pressures that will create. So, I guess, those are the supplementary comments I’d make about Motorhome.

Turning to the Towables business. I already talked in response to Craig’s question on discounting that we executed in the Winnebago branded Towables business that was certainly a headwind to margins in the quarter and a necessary reaction to the pressures that they are facing in the market considering the positioning of their product relative to the market.

And the fact that it’s an evolving brand that we are working hard to mature and make more comment, but nonetheless, we are subject to the pressures of the industry right now and it’s certainly the case in the Winnebago branded Towables business.

The strength of the Grand Design portfolio is obviously continuing and we think that we will be in a position of taking more pricing to offset the material cost inflation, that’s what I was referring in my earlier comments.

And that those price increases will be rolled out. We feel like we have the positioning within the Grand Design portfolio to do that and so I expect that margins will see some improvement as we execute on those pricing decisions and as we ideally in the Winnebago branded Towables business are in a better position to discount less going forward as well. So I would offer those comments, Seth.

[Seth Woolf, Northcoast Research]

Okay. Thank you.

[Bryan Hughes, Vice President and Chief Financial Officer]

Thank you, Seth.

[Operator]

Thank you. Our next question comes from Steve O'Hara with Sidoti & Company. Your line is open.

[Steve O'Hara, Sidoti & Company]

Yes, hi, good morning.

[Michael Happe, President and Chief Executive Officer]

Good morning, Steve.

[Bryan Hughes, Vice President and Chief Financial Officer]

Good morning, Steve.

[Steve O'Hara, Sidoti & Company]

Good morning. Just curious on the, I guess, on the improvement within the margins on the Motorized side. Can you just talk about how much this was driven by kind of product mix? You shipped the lot less Class As in the quarter and I think that’s where the core issues have been on the Motorized side. Can you just talk about how that impacted the quarter?

And if maybe there Class A had been flat and some of the others have been down more, maybe how that would have impacted margins? I guess, I am just wondering where are we on the Class A improvement margin side.

[Bryan Hughes, Vice President and Chief Financial Officer]

Yes, I think Class B and the strength of Class B in particular was a favorable mix, but that said, if we had, had a lot more of a Class A and Class B strength, I don’t want to convey that that would have diluted margins and that was a huge mix issue.

I think it was largely a pricing aggressiveness that offset the material cost increases and then, addressing the operational, what I’ll call operational inefficiencies that we saw during the first half of last year. So it’s primarily that that drove the improvements in the margins.

[Steve O'Hara, Sidoti & Company]

Okay. And then, just on the margins versus the Towables side, it seem like, I thought the comment was that the commodity cost pressures impacted the Towables side more so than the motorized side and I am just wondering why that would be the case? Are you behind in kind of passing those price increases on versus the Motorized? Or are they kind of on par with each other?

[Bryan Hughes, Vice President and Chief Financial Officer]

Yes, fair question. In the Motorized business we call it’s more vertically integrated that creates some of that difference or at least creates a difference in the timing of when those costs might be incurred. But it’s also is in internal hedge against the increases. Towables business is more exposed to pricing increases that are passed directly to them from the vendors.

So I think that that is one of those differences and then I will also say that the Motorized pricing timing was weighted more towards the early. The Towables business has been more gradual in the recovery of the pricing. So I think those two things are really, what I would call out as some of the differences in between the Motorized margins and the Towables margins.

[Steve O'Hara, Sidoti & Company]

Okay. And then, maybe just lastly on CapEx. I don’t think I heard it, but where do you see that playing out for the year? And I mean, it seems like the – based on your commentary about aspirational retail, I mean, would you expect CapEx to be down this year?

And then, maybe what the reasonable runrate in kind of a flat environment generally? I mean, obviously that’s not typically available, but just curious what that would might be?

[Bryan Hughes, Vice President and Chief Financial Officer]

Yes, we are going to take a cautionary approach to CapEx and our investments there given the environment that we are in. We will have investments that we have committed to in the form of the expansion projects for the Towables businesses and the completion of those obviously and we think that those are still prudent investments to make even in the environment that we are in.

But I think a reasonable rate to use this year for now would be in the $35 million to maybe $40 million. But, like I said, Mike and I will be keeping a very close eye on the environment that we are in and pulling back or even accelerating those investments as we think prudent.

[Steve O'Hara, Sidoti & Company]

Okay. Thank you very much.

[Operator]

Thank you. Our next question comes from Gerrick Johnson with BMO Capital Markets. Your line is open.

[Gerrick Johnson, BMO Capital Markets]

Hi, good morning.

[Michael Happe, President and Chief Executive Officer]

Good morning, Gerrick.

[Gerrick Johnson, BMO Capital Markets]

Hey. The inventory on your book is up 25%. Can you discuss that a little bit? I am sure there is some Chris-Craft and higher input cost, but maybe you could break down the components of the inventory increase and how you feel about it? Thank you.

[Bryan Hughes, Vice President and Chief Financial Officer]

And that increase that you are citing is versus the year-end.

[Gerrick Johnson, BMO Capital Markets]

Year-over-year.

[Bryan Hughes, Vice President and Chief Financial Officer]

Year-over-year, Q1-to-Q1? Yes, I think that there is a couple things going on. We have got increases in our chassis inventory that we have taken on for strategic reasons. That’s one thing driving it. We certainly have higher finished goods on our lot just by virtue of the industry dynamics that we are in. And so, those two things are going. And so some of that’s industry-driven and some of it is indeed just timing.

Another factor as the industry flows down, you’ve got purchases that are coming in the door that you are continuing to adjust downward and so you got some timing that you deal with on inventory in that regard too. And that would be what I am referring to there as raw inventory.

So, primarily in inventory I am saying, and some AR as well and that just gets to some of the timing of orders when they happen year-over-year, but nothing systemic that I think you should assume in your models that that would be resolved in other words I would anticipate in Q2.

[Gerrick Johnson, BMO Capital Markets]

Okay. Thanks. And then in Motorized, you are basically able to double Class B capacity. How are you able to do that? And how are you allocating production and capacity across Motorized?

[Michael Happe, President and Chief Executive Officer]

Yes, our Class B production, Gerrick, is run out of a couple facilities in North Iowa and we are very pleased with the manufacturing and the operations team ability to continue to allow us to grow shipments and share in Class B within our existing infrastructure.

And so, it is a lot of hard work in terms of being able to reflow the operations within, particularly the biggest Class B plants and increase throughput, reduced tech time with no sacrifice, certainly we hope on product quality and reliability once those products are built.

It’s funny that you’ve raised the topic in this way and I’ve recently asked our team some of the what if questions about the potential we have in Class B and how and if this category continues to grow in the future, what our plans are in the very long-term to continue to keep up with our potential. So, it’s a very active ongoing topic right now with our Motorhome manufacturing team and we believe in North Iowa, we have plenty of capacity in terms of space.

And also labor to be able to find ways to continue to grow Class B. But the team is doing a great job and they worked very hard to keep up with our potential in that market and we have every intention of making the investments necessary to not let our manufacturing side be a constraint on our Class B growth in the future.

[Gerrick Johnson, BMO Capital Markets]

Okay. And just quickly a follow-up. You brought it up, so, I will ask you a question about it. You mentioned warranty and it has been an issue for Thor. How is your warranty expense affecting your margins in this quarter compared to last year?

[Michael Happe, President and Chief Executive Officer]

Yes, our warranty expenses over, really the past number of quarters has been quite stable. I would probably characterize them as flat. I’d have to go look at each of the individual businesses, but on a consolidated basis, they are probably running about flat and we always want to be careful here of being overconfident, because we’ve had quality issues here and there certainly in our past.

But we view that as one of the differentiators within our business model. And our teams at Grand Design, at Winnebago Towables and at Winnebago Motorhomes are - and at Chris-Craft are focused on superior product quality versus the competition everyday and our employees do their best to try to deliver that to our dealers and I think a high majority of the time we do and when we fall down, we take care of the problems on up to them and resolve those in a hopefully expedient way.

But yes, it has not been a major deterrent. I wouldn’t tell you that warranty rates are getting materially better per se, they are just pretty stable. But stable in this industry right now is a good thing and the dealers do give us credit, especially on the RV side for us working hard to try to deliver products to them that show up and have been inspected and are in good shape and are ready for retail sale with minimal dealer work on their lot. So, it’s definitely a part of our recipe for success going forward.

[Gerrick Johnson, BMO Capital Markets]

Great. Thank you, Mike.

[Michael Happe, President and Chief Executive Officer]

Thank you, Gerrick.

[Operator]

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

[Michael Swartz, SunTrust Robinson Humphrey, Inc.]

Hey guys. Real quick one from me. I think everything that I wanted to ask has been asked but, as people were kind of planning about the possibility that retail continues to slow or decline in 2019, maybe you can just frame, I guess, your cost structure for us and maybe relative to five ten years ago, I know you guys weren’t here at this time. But in terms of variable versus fixed cost structure, how does the business look today? How did it look maybe going into during the last recession?

[Michael Happe, President and Chief Executive Officer]

Michael, good morning. I’ll offer a comment first, Bryan, and then ask you to follow-on. I would say, from a macro standpoint, in some ways, we’ve always had a highly variable cost structure and the great work that was done five or ten years ago by leaders at Winnebago Industries before those of us on this call got here, I think they were always focused on having a highly variable cost structure. I would contend that what’s different today is, and I’ll let Bryan speak to that cost structure specifically, what’s different today is two things. One, our portfolio mix is different. And so, we have a less vertically integrated component of our business in Towables, which is growing, whose gross profit margin tends to run higher than Motorized, but it has less innate vertical integration infrastructure around it.

Secondly, we are very focused today on operational efficiencies. Productivity, even things like employee safety which improve the culture, workplace retention, can even lower cost at times, but our teams are becoming more effective at driving waste out of the organization where they see it and we are not as formal from a lien standpoint as we’d like to be some day.

But we are getting better every quarter with identifying projects. And so, I would say our flexibility in addition to our variability of our cost structure has also improved here over the last three to five years. Bryan, any other thoughts there?

[Bryan Hughes, Vice President and Chief Financial Officer]

Yes, I think you mentioned that the portfolio is very different today than it was during the last recession. But that said, at a high level, if you look at our cost structure as a percent of sales, it really hasn’t changed that much and we continue to analyze that and we work hard to retain that variable nature. So we can react given we are in a cyclical industry.

But I think I had said this at the investor meeting last year that we were about an 80% to 85% depending on the business you are looking at, 80% to 85% variable cost structure and that is consistent with where we are today and it’s consistent with where we were when we were a singularly Motorized company. So, we have retained that flexibility to react in any kind of downturn.

[Michael Swartz, SunTrust Robinson Humphrey, Inc.]

Okay, great. Thanks a lot.

[Michael Happe, President and Chief Executive Officer]

Thanks, Michael.

[Operator]

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

[David Whiston, Morningstar, Inc.]

Thanks, good morning. If a downturn did hit sooner than later, are you guys comfortable with the balance sheet’s debt levels where they are now? Or do you think it to be cost less for you to that?

[Bryan Hughes, Vice President and Chief Financial Officer]

We take great pride in managing that closely and always understanding where we are heading and what kind of downturns could come and so, no, I don’t think we are flat footed at all. In fact, we are well prepared to sustain a downturn.

And we will manage very aggressively should a downturn start to affect our performance in a more meaningful way. Right now, as we just disclosed, we’ve got great growth and good cash flow and it continues to allow us to pay down debt. So, we are feeling confident sitting here today of our position on the balance sheet.

[David Whiston, Morningstar, Inc.]

Okay. And on discounting, is that – what you’ve seen recently, was that pressure really all on the Winnebago Towables side or is it also on the Motorized side? And then, a second part to that question would be, you talked earlier about how the Winnebago Towable brand. Is it relatively a young brand in Towable.

So, how do you balance protecting the brand which Mike, I know you just talk about many times as so important versus staying competitive in that market when you are trying to differentiate yourself from the established players in Towables?

[Michael Happe, President and Chief Executive Officer]

Yes. Thanks, David, for the question. I’ll speak first to the breadth of the discounting. The answer is, yes, our Winnebago branded RV businesses, both Motorized and Towables are more susceptible to the pressures of industry-wide discounting, especially discounts offered by OEMs to dealers to take product into the channel.

Those have a more competitive direct impact on the two Winnebago businesses, largely because, the business model still has a legacy of negotiating on a more individual basis with the dealers that carry our products. That is something we certainly are doing everything we can over time to try to get away from.

A great credit and kudos to the Grand Design team who when they started their business six years ago took a very fundamentally, philosophically pure stance on how they would take orders from dealers, how they would price orders, and starting with a white piece of paper, they were really able to come out of the gate with a business model that again to their credit to our credit now, we remain committed to.

The Winnebago side RV business is one where we hope to evolve to a place where we are less impacted by competitive discounting in order to reach our sales and profit goals. But that’s a journey. Specific to Winnebago Towables, it is a relatively young Towables business. We bought that business in late 2010 from a company called Saybrook, and while we are pleased inordinately with the progress that has been made especially in the last two years, we admit very publicly that we have much work to do to mature in that business.

The product line has been very centered around travel trailers, especially light weight travel trailers and Scott and his team had done a great job there taking share in the spaces they compete. But we have no presence of significance today and stay content. We have no presence of significance in sort of mid and high profile fifth wheels and our Toy Hauler line is just now being reintroduced with the introduction of the recent Spyder. So, Bryan and I both had the opportunity this week to be on the Winnebago Towables campus and to even walk the new buildings that we are opening up for both assembly and lamination there that will allow that business to continue to grow, but will also be the home to some of these new products we are introducing.

So, has the Winnebago Towables business strengthens this product line, as we continue to create a stronger team and culture there and as we continue to earn trust with more A and B dealers in the RV industry, that business should not only be able to perform better, but should be able to protect against variability in its financial performance in a more consistent way.

So, yes, great question. Definitely a work in progress, but, one as you know, we are strategically committed to. So that people can get into the Winnebago brand at a more affordable place than they otherwise could have. We were only a Winnebago Motorhome business.

[David Whiston, Morningstar, Inc.]

Thanks. That’s helpful. Just one more question, it’s on rental. Reading between the lines today, it sounds like perhaps rental is not going to be as good as it was last year and did they come in a lot softer, how much of that going to mess you up meeting your fiscal 2019 projections?

[Michael Happe, President and Chief Executive Officer]

Well, I would be careful, I am not going to be as good. I think there is a – we have a little bit of a timing situation here with some of the rental business. As Bryan mentioned, we are having good discussions with a number of our rental partners. I am actually confident that we may have a path to come out with a net positive market share increase on the rental business specific to Motorized in our fiscal 2019 year.

And I won’t get into details of how much and to whom, but, I do believe where the industry slowdown is having an impact on the rental side is the turning of the fleets that these rental companies go through. As you know, they buy units from the OEMs. They use them for a period of time as rental units and then they dispose of them either selling them direct to end-customers or in many cases, trying to find other independent dealers to take that rental inventory and then those dealers will sell it.

As the industry has slowed a bit, and obviously all dealers are more acutely managing their inventories, I think that fleet turn on the rental side is probably slowing a bit. And again, the rental market is a meaningful, but not a huge percent of the Motorized business. And so for us, it’s been more of a timing as we’ve been working with each of these rental companies on how many units do you want?

When do you want to take them? But in some cases, we are getting more from rental companies than we have before and in other cases, maybe we are getting a little less. We think it will be a net positive gain for our Motorized team this year.

[David Whiston, Morningstar, Inc.]

Okay. Thanks guys.

[Michael Happe, President and Chief Executive Officer]

Thanks, David.

[Operator]

Thank you. Our next question comes from Greg Badishkanian from Citi. Your line is open.

[Fred Wightman, Citigroup]

Hey guys. It’s actually Fred Wightman on for Greg. Just one quick one. I think earlier you had mentioned that dealer inventory has been improving month after month. I am wondering if you could just expand on that a bit.

I think in the past, you've talked about 20% to 25% of dealers having a bit more inventory than you’d like. So, how is that sort of trending today and then, where do you sort of see the inventory levels going forward?

[Michael Happe, President and Chief Executive Officer]

Well, I think they are getting better sequentially. We are always at – we don’t always have the industry field inventory information on our fingertips, but, I was pleased to see the comments from Thor Industries in their last earnings call about their field inventories year-over-year being in more positive ranges than previously.

And so, obviously with Thor being such a large part of the RV market, that’s probably as good a parameter as we all have as anything. But we talk to the – especially the inventory finance companies regularly. And again, consistent in some ways to previous calls, there is no panic going on there about the aging.

Turns have certainly slowed a bit as retail has slowed, but dealers are being very prudent in their restocking behavior and I don’t have a probably a percentage. I would offer this time as to, which dealers are still over-inventory.

And I think it certainly continues to decrease what we like on our side is we are also seeing a sequential improvement in our field inventory levels from the prior two quarters and even as we sit here today, three or four weeks into our second quarter, our field inventory level today is less than it was percentage growth-wise than it was at the end of Q1.

So we continue to go the right direction there as well. Although we’ve always maintained that our field inventory levels are appropriate even with an increase based on our market share growth, our new products, and the way we are trying to increase the quality and quantity of our dealer network on the Winnebago side. So again, I think every month, it gets better.

I think next spring will be very important to kind of see dealers come out of the winter and how optimistic or not they are about retail prospects going into the spring selling season based on shows, open houses, other things. So, I think we'll have a really good look at that as I mentioned to Seth, in the – probably the February, March time period.

[Fred Wightman, Citigroup]

Okay. Thank you.

[Operator]

Thank you. Our next question comes from Steven Litt with 4010 Capital. Your line is open.

[Steven Litt, 4010 Capital]

Yes, my question was answered. Thanks.

[Michael Happe, President and Chief Executive Officer]

Thank you, Steven.

[Operator]

Thank you. And I am showing no further questions at this time. I would now like to turn the call back to Mr. Steve Stuber for any further remarks.

[Steve Stuber]

Great. Thank you, everyone for joining us today. On behalf of Mike, Bryan and everyone here at Winnebago Industries, we wish you happy holidays and all the best for the New Year.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. This concludes today’s program. You may all disconnect. Everyone have a great day.