All right. Good morning, everyone. Thank you for joining us for the 45th annual Raymond James Institutional Investors Conference. I'm Joe Altobello, the Leisure Research Analyst here at Raymond James, and I'm very pleased to introduce Winnebago Industries. The company is probably best known for its Winnebago, Grand Design, and Newmar RV brands. However, over the past few years, it's also expanded into the marine space with the acquisitions of Chris-Craft and Barletta. It's no secret that both the RV and marine industries have been through some peaks and valleys since the start of COVID, though it appears that Winnebago has navigated through it rather successfully. With us today to tell us how they've done it and, more importantly, how they expect to continue to do it, is the company's CFO, Bryan Hughes. Welcome. I think Bryan had a few introductory remarks.
If you wanna make some introductory remarks, we'll dive right into Q& A. It's totally up to you.
No, we can go right into Q & A. First, I'd just like to thank you for having us, Joe, and Raymond James for having us. And thank you for, all of you for being here this morning and for those of you online, for your investment in time as well as your, your thoughtfulness on investing in Winnebago Industries. So I appreciate that. And let's just get into it.
I should also remind everybody, they are reporting earnings in two weeks, so we're gonna try to keep our questions at a bit of a high level today so as not to get any trouble here. So let me start with demand first, with RVs. You know, the industry obviously benefited significantly from COVID. In recent years, it's come back down to earth. And so what are you guys expecting in terms of industry growth in 2024, and how does your outlook differ maybe between towables and motorized?
Yeah, thanks for that. I, I think what I'll do is I'll start near-term, and then we'll kinda get into a, a longer-term discussion about where demand has been and where we see it going. So when we reported our Q1 results, back in December, one of the comments that we made was that is expectations around Q2. So we were certainly dealing with the seasonality of the winter months here, and we were working very closely with our dealer network. We try to be very disciplined in our approach, in our production, our output, how we utilize our capacity, particularly in the, the seasonal slow time.
What we were hearing back in December from our dealer network was a strong reluctance to take more product, a pretty strong sentiment in that regard, certainly driven in part by interest rates, the cost of carrying that our dealer network has, so very sensitive to taking on more product, particularly, like I said, in the slow months of the winter. So we rarely provide a forward view. Back in Q1, we did talk about Q2 specifically, and we made note of our towables and our marine business in particular would be down sequentially from Q1 into Q2. Now, we still have some analysts that haven't fully digested that, and so that's in part why I'm reiterating it. I think, Joe, you guys are where you need to be.
But there's pressure still on both towables and marine sequentially, driven in large part by our discipline combined with what we're hearing from our dealer network and their strong desire to reduce inventories as much as they can, get their turns up very strongly. So I wanted to point that out up front here as it relates to Q2, that you know, the marine in particular, that segment is really struggling. You see that with some other public companies that have disclosed as well. One of our floor plan financiers came out with some information just recently where marine shipments or the OEMs selling into the dealer network were down 35%-40%, you know. So just to give you some idea of where the industry is at there. And so that's just one of the things we're fighting in the near term.
Now, longer term, which is kind of, let's get into that because that's really where your question was. Why don't we flip to slide seven, if we could, because I think that does a nice job of laying it out. There's a few things I wanted to point out here. First, just how the chart is laid out. The lighter bars are the retail results for the RV industry over the past several years. The darker bars are the shipments by the OEMs into the dealer network. And so a couple of things to point out here. First, you notice since the years 2017, 2018, and 2019, so-called those pre-COVID years, we had pretty strong retail, 470-490 range, consistently.
And then we headed into the COVID years, in the really interesting in the recent history years of 2020, 2021, 2022, and then most recently, just wrapped up 2023. So you can see the retail outpacing the wholesale shipments in the year 2020. That's as the demand from COVID anything outdoors was doing extremely well at that time, whether it be RV, marine, golf clubs, bicycles, you name it, which we are not in, to be clear. We're in RV and marine. But anything outdoors really took off starting in that year 2020. The industry was constrained, as was, you know, many industries were constrained, frankly, in 2020 by the supply chain and some of the challenges we saw. The RV industry was no different. So you can see retail outpacing wholesale pretty dramatically in that year 2020.
And then again, in the year 2021, you can see the dramatic increase in output or the shipments by the OEMs in that year 2021. In 2022, retail started to soften as people somewhat returned to pre-COVID activities. That endured into 2023 as well. So people started to swing that pendulum back to a lot of air travel, travel, staying in hotels, going to entertainment, concert events, sporting events, those things that they couldn't do, right, during those COVID years that were restricted. So we've seen that pendulum swing in 2023. We expect that long-term, that pendulum will come back to some normalcy, as people return to some of that pre-COVID activity. We know the RV lifestyle to be sticky. We see it in all the surveying.
So we have talked externally about a mid-cycle, call it retail level of that 425,000-450,000 units based on you see the pre-COVID, as I talked about earlier, of 2017, 2018, 2019, in that 470,000-490,000, roughly, retail units. So we think that 425,000-450,000 is a reasonable, if not somewhat conservative, mid-cycle estimate. If anything, there are some things going on that we think lift that water level. One is that the average age of a buyer continues to come down quite dramatically from 50 years old of an average buyer some 15 years ago. It's now close to 40 years old, the lower 40s as the average age.
With the repurchase cycle that the industry has shown over time, every three to five years an RVer will repurchase or upgrade or change their floor plan to fit their family or their usage in some manner, better. So that recycle, or that repurchase, period is certainly, it's benefited by that average age coming down. Secondly, the diversification of the buying group is broadening significantly as well, ethnic diversity being 40%, roughly, now of RV purchases. And that was a figure from 2022. So that diversification of the buyer is also increasing the population of households that are interested in the RV lifestyle. We think that that, likewise, has a lift to the industry.
And then the third thing I would point out is just the post-COVID flexibility that is proving to be, you know, living still, which is flexibility of the work-life balance, being able to work remotely or virtually. A lot of people are able to do that these days. And we think that that adds to the utilization of that asset, that RVer, the boat, gives people more opportunities to use that asset. So those three things I'd just point out as things that are lifting that water level, if anything, from that mid-cycle level of 425,000-450,000 units. For 2024, not shown here, but 2024, most of those in the industry are calling for flattish retail, 350,000 units to 370,000-380,000 units. That's the range that is being forecasted for retail with inventory levels.
This is an important thing to know, with inventory levels across the dealer network largely being where they need to be. A lot of dealers are now, through the surveying, expressing more comfort with the inventory levels across the channel such that that relationship between retail and wholesale should approach more of a one-for-one relationship here in calendar year 2024. So with the retail being at 350-370, it's expected that wholesale will be in that similar 350,000 range. In fact, the RVIA just came out with an updated estimate calling for that 350,000 units as a midpoint. So 350,000 units compared to what you see here in wholesale shipments for 2023, we're talking about a double-digit increase expected in calendar year 2024 in wholesale shipments, when compared to that destocking that occurred in 2023.
About 65,000 units, roughly, came out of the dealer network in 2023. So as I mentioned, we believe that those dealer inventories are at a good level here as we get into the selling season of 2024. It's been slow to start the year over the winter months for the reasons I mentioned earlier, that being dealers are just really anxious to take on inventory and aiming for a higher turns level given the cost of carrying inventory. That's part of their business model, is that the floor plan financing for the inventory that they carry, is something that they pay to the banks, in the form of lending. So, very sensitive to that, both for cash flow reasons as well as just how their P&L and their margins look.
So that's, I rambled a lot there, Joe, but that's kinda the near-term view for what we're expecting, what we mentioned in Q1 about Q2 specifically, towables and marine being down sequentially from Q1 for those reasons of us being very disciplined and sensitive to what we're hearing from our dealer network. And then longer term, we think that there's good opportunity here based on that mid-cycle of 425,000-450,000 units.
Thank you for that, Bryan. Just going back to your Q2 results, which are coming up in a couple of weeks, you just completed a Convertible Senior Notes offering. How might that impact the financials in this quarter, if at all?
Yeah, we had a convertible note that was due next April. And so, we like what you're seeing in the markets. And so we refinanced that convertible note with another convertible of $350 million. And so the process of refinancing, particularly, that's a relatively complex instrument, as many of you in the audience here know. So there's a P&L impact from certainly from doing that. We did pay a premium based on where the prior note was trading in the market. And so some of that gets flushed through the P&L.
What we're gonna make sure we do is in our Q2 release, we'll call all that out, make it really clear for the investor community again, like we have been doing, using our adjusted EPS metric, a non-GAAP metric, to and to talk that through and make sure investors understand really well the cost of that refinancing, what goes to the P&L, what gets flushed through the balance sheet and equity, and what the resulting EPS is, excluding all that transaction impact.
Got it. Okay. Just going back to your commentary regarding demand, and dealers staying cautious. It sounds like they're gonna stay cautious until we see that inflection in demand at some point this year. Is there some sort of timing? Is it April? Is it May when you expect retail to start turning positive again?
Year-over-year?
Yeah.
Yeah. I think that that's an estimate that I've heard out in the industry that, you know, we need to get into the selling season here. That's dealers are anxious to get some of that turn going, get the inventory off the lots. There's some dealers that are still struggling with model year 2022 and model year 2023 product. And so that in particular, they wanna make sure they get that moved off their lots. Model year 2025, in the industry will come on. This is true of both RV and marine, comes out in that June, July period. So it's another reason why dealers are slow to order right now, is they do have some model year 2023 and even 2022 out there that they're trying to move.
So we're looking for, you know, as an industry on the RV side, I think April, May is a time period, I'm hearing, for when retail will start to show growth year-over-year. Marine, I think could come around that time as well. That too will be impacted by how dealers feel about their inventory levels. I think marine, in general, tends to lag a bit, the RV cycle, you know, from peak to trough. They're both very cyclical, of course. But historically, marine has lagged RV. So that year-over-year growth could come later for marine based on historical expectations that have been laid.
For RVs, maybe a late model year 2024 event. For marine, maybe an early model year 2024.
More, more 2025.
Okay.
Yeah.
Got it. Is there a chance we see a restock this year on RVs?
I'd be surprised by that. Based on what we're hearing from dealers, they are with the higher interest rates, they are very much leaning on higher turns as their desired outcome. So I'd be surprised if you saw a restock. As I mentioned earlier, I think more likely is a one-for-one relationship between retail and wholesale.
Okay. The term affordability has come into play in the industry, in the RV industry in particular. Over the last year or so, pricing has gone up considerably during COVID. We're now seeing invoice prices coming down, which is highly unusual. How do you see pricing in the industry going forward? And would you expect another downward price movement in model year 2025, or is this sort of the one-year reset?
Yeah, there's a lot going on there in the costs as well as the price. You mentioned, over the COVID period, we saw a lot of inflation across our key cost inputs. We priced in reaction to that. The industry could price because there was such strong demand. So you saw depending on whether you're in towables, we saw probably 40% in that range of cost and price increases, less so on motorized and marine, you know, maybe more in the 20%-25% range just on average. What we have seen since then is we have seen some cost input easing on the towable side. Now, that has allowed the industry to bring pricing back a bit in towables. We're also seeing a mixed impact.
And so I don't wanna overlook that because there is a preference by the consumer for value. And so there is a trade down that is occurring that's bringing from a mixed perspective some of that average selling price down as well. On the motorized and marine side, we're still seeing slight inflationary pressures on the chassis for the motorized RV and on the propulsion or the engines for marine. You know, so we're not on balance. We're seeing stability in the overall costs. For motor home and marine, we're not seeing the same easing of costs like we're seeing in the towables business. And so from a cost input, I think that's what we're expecting, pretty stable costs per unit, apples to apples, going forward now based on what we're hearing from our suppliers.
On the pricing side, as I mentioned, we are seeing a preference by the consumer for value right now. Now, we have premium brands. And so, as you can all appreciate, that's something that is a very dynamic conversation for us. We wanna retain the reputation we have in the marketplace, retain that premium status. But we also wanna meet the customer to the extent we can where they are. So we have introduced some new lines this year, some new product that does accomplish some of that product simplification that results in cost reductions, selectively. But we are pursuing that, as the consumer is trading down.
I think the industry is expecting model year 2025 because of some of those moves, but then also on the towables, towable side, and the cost deflation that the industry is seeing on the towable side, to have model year 2025 come down a bit on the towables pricing.
Okay.
That's what I see happening as well as that mixed impact, like I was saying, some customers seeking the value products in the lower end.
Some towable invoice pricing coming down in model year 2025, but not as steep as it's on.
I think so.
Okay.
I think so. I think, frankly, that's part of what is impacting dealers' willingness to take product here, model year 2024. I think that there is this expectation that the dealers have, that the model year 2025 product could see some cost deflation. Now, there's a lot of discounting going on for OEMs helping the dealers move some of that model year 2023 and certainly model year 2022 product to get the inventory clean, and that model year 2024 will see some discounting as well. But I think there's a general tendency by the dealer network to minimize inventories heading into the model year 2025 introductions. So we're seeing some of that pressure the dealers as well in their ordering of the OEMs.
Got it. You mentioned promotions and discounting and things like that. We didn't see any of that in 2021, really, or 2022 to some degree. It's back. Are we back to 2019 levels in terms of A&P spending?
I think by the time we get into, you know, this one-for-one environment, retail to wholesale, and we start to see some stabilization in the retail, the model year 2025s, yeah, I would think that the industry would get back to pre-COVID discounting and allowances provided both to the dealers and the end customers. That's the current expectation. We'll see how that plays out as calendar year 2024 here plays out.
I just wanna shift, let's switch over to Boats for a second. You touched on this a little bit earlier, but in terms of inventory, you know, the RV space, as you mentioned, was going through a destock last year. Boats largely were going through a restock last year. So we've got a little bit of a tougher comparison. It seems like there are pockets of the marine industry that are fairly heavy, pontoons being one of them. So how would you assess the inventory situation for Barletta?
For Barletta specifically, well, I'll talk to the industry first, and then we can get into Barletta. You know, the industry was constrained by primarily engines, frankly, during the peak years of COVID. And so it didn't see the same level of a spike that you're seeing here on the RV side. And you also have this delay in marine, but then they're typically behind RV in the cycle. I think that the, you know, in everything we read about from both analysts as well as those public companies out there, I think marine does have some destocking left to do. Now, what we've seen with Barletta, you know, this is a very fast-growing company. It's a company that's only, like, five years old. We're very pleased that we were the beneficiary of that acquisition. So they've been growing market share very nicely.
Their retail has actually performed very well, but they are in the industry, and they are selling to dealers who feel like they are overstocked. And so they've been sensitive to that and trying to work closely with their dealer partners to manage the ordering and the inflow. We're expecting good things from Barletta here over the next several years and even in the near term, the next year. But I think the dealer network does feel like they have plenty of pontoons. They've got plenty of other categories. Interest rates, the carrying cost is high. And so we're expecting that to certainly have an impact on the ordering we see from dealers, even on a hot brand like Barletta.
If we think about demand for both RVs and marine, is there something that could happen that could spur that? I'm really thinking about an interest rate cut or two in the second half of this year. How important would that be to demand?
I think it would be important. I think, you know, and I think the community here knows it's important. Anytime you hear speculation about interest rates potentially coming down sooner, like we saw starting, oh, as we entered winter, you know, our stock starts to see some improvement. So, I think that everybody here knows there's a connection between the interest rate and the consumer's ability to buy the product. So, I think that that is an important part of the equation, certainly.
Got it. We've got about five or six minutes left. I wanna make sure I touch on capital allocation.
Yeah.
You guys have obviously a very strong balance sheet, gives you guys a fair amount of flexibility, and you've certainly taken advantage of that. You've reinvested in the business. You've raised your dividend. You're buying back a fair amount of stock. And you've also done some M&A, which I alluded to earlier. As in terms of your priorities, how would you rank them at this point?
We'll continue to be focused on growth. Okay? We think that there's a great opportunity for us long-term to take our position in premium brands, the reputation we have for quality, for innovation, for servicing the customer post-sale. All those things, we intend to leverage, again as we go forward. So, you know, that our position out in the marketplace is such that, we'll continue to see the benefits longer term, from that growth. Our capital outlay, and that will be our focus is investing in this business, growing organically, inorganically. We will continue to be acquisitive. We've been very pleased with the strategic acquisitions we've picked up. Most recently, Lithionics. That was our first vertical that we invested in.
We've historically just purchased other brands going from good to great that were positioned as premium brands and matched us very well from that perspective. When we purchased Lithionics, that was kind of a new deal for us in that we bought into a vertical. And that's because we saw that as a strategic advantage. Okay? We don't see investing in verticals that are more commodity-related, but if it could provide us with a strategic advantage as consumers shift from using diesel or gas-powered generators over to electric, which is going to happen on the house power, we wanted to be positioned well for that. And so we've been very pleased so far with the Lithionics deal. We think it actually represents more upside to us even than when we were envisioning the future upon acquisition. So it's played out really well.
We think there's other applications we can pursue, even outside the RV industry. So it's a good growth vehicle for us. So that inorganic activity, whether it be another strategic vertical, but even more likely an OEM that fits our profile, premium brands going from good to great, that will continue to be a focus of ours from an M&A perspective. On the balance sheet, you know, we like liquidity in that $250 million-$300 million range. We've got an untapped ABL still for $350 million. So we've got plenty of cash on the balance sheet. So we're well-positioned on the balance sheet. We seek liquidity, a net debt to leverage ratio between 0.9-1.5. We're perfectly in that range as we wrapped up Q1. Expect that we'll be in that range too as we wrap up Q2.
So that's an important metric for us to just manage the cyclicality of the business appropriately. We have said historically, we've spiked that to as high as 3.0 for the right deal at the right time. If you look back at our acquisition history, Grand Design, it was really our first acquisition of size in our history. And we took our leverage ratio as part of that deal to 2.6-2.7, right in that range, paid it down very quickly. You look at our other acquisitions, and that's what you'll see, you know, a net leverage ratio coming out of the deal of 2.0-2.5, right in that range. So given where we're at in the cycle, you know, we'll be very mindful of our balance sheet and the net leverage that we take on.
You lastly mentioned dividends, share repurchase. We've taken our dividend up five years in a row now, 50% two years in a row, which was a really nice increase. We're seeking a, you know, a yield that makes sense for the investor community in light of also wanting to be a growth company and making sure that we have, you know, that dry powder ready to go to continue to grow the business. And we think there's a lot of opportunity there. So that will be what we aim for. Share repurchase, likewise. You know, that's a great tool for us to dial up when it makes sense to do so. You know, we saw a lot of price dislocation in the M&A space, you know, through that peak. And now even in the trough, you see a lot of price dislocation between seller and buyer.
It's tougher to get a deal done. In that environment, we did use share repurchase a little bit more heavily just to make sure that we were rewarding our shareholders for holding us during that peak.
You mentioned earlier buying a potential OEM. There aren't a lot of RV OEMs of size still out there.
Right.
Marine, there is. Well, could you see yourself going into another space like power sports, for example?
You know, what we've talked about in the past is we'd continue to look at those RV OEMs. There are some that, that are growing in, in some of the sub-segments within RV that, that we could find to be a good match, you know, premium brands on their way from good to great. Marine is less concentrated in ownership, certainly. You know, the RV side is, you know, the three of the big players. They're owned probably 95% of the market. It's much more fragmented on the marine side, more opportunities as a result. We'll continue to look at similarly positioned, you know, good to great marine companies. That's gonna be our focus. As I say, power sports, you know, there are some great players in power sports. Polaris, another Twin Cities company being one of them, and Bombardier, being another great player there.
So, that's a little harder for me to imagine sitting here today, given all the opportunities we have within our core markets now of RV and marine.
Last question, with about a minute left, Grand Design Motorized launch. How's that going?
Yeah. We announced that earlier this fiscal year. We were very excited for Grand Design to come to market. This is a move that dealers have been asking for, for several years now. Ever since we bought Grand Design, we've said that that would be an opportunity for us when the time was right. So we're expecting to start shipping here, in the next 3-4 months, our first product, Grand Design Motorized product. I know the dealers are excited. The end customers are excited. We're hearing that from them. So it should be, we're expecting some success there. Then we're excited about it. It's going really well.
Great. Well, I guess we're just about out of time. So, Bryan, thank you for your time today.
Yeah. Thanks, everyone.
Thanks, everybody.
Appreciate it.
Enjoy the rest of the conference.