Okay, well, listen, I think we will get started. The doors will close momentarily, but, welcome to the Winnebago Industries Group presentation. I am Craig Kennison from Baird Research. Winnebago is building a portfolio of outdoor lifestyle solutions through some iconic brands in the RV industry and also the marine industry. These are brands like Winnebago, Grand Design, Chris-Craft, and Barletta. We're so pleased to have with us today Bryan Hughes, who is the CFO of Winnebago. Bryan has a few slides, and then we're gonna jump into a fireside chat. Bryan?
Thanks, Craig. Thanks everyone for joining us this morning. I appreciate your interest in Winnebago and our story. I'll start with the usual warnings of forward-looking statements, the customary cautions h ere. We also have our earnings release on Thursday, June 20th. So we're in kind of our blackout period right now, but we'll still have a very good conversation to orient you to our story here and what we're trying to accomplish. We're about a $3 billion company right now, coming off of a peak at $5 billion on a rolling 12 basis during the height of COVID and the outdoor interest that a lot of industries saw.
We're a full range of RV products, both motorized and towable, as well as have a marine portfolio now, including pontoon exposure with the great brand Barletta, that Craig referenced, as well as the iconic Chris-Craft brand. Our locations, as you see on the attached far right, our headquarters are in the Minneapolis area. We have our legacy motor home business, Winnebago, branded in Northern Iowa, several businesses in the Elkhart, Indiana, area, and then also a couple businesses down in Florida, namely Chris-Craft and our new Lithionics battery acquisition down there in Florida. We have several strategic priorities that we've highlighted over time. One, to build a great culture. Two, to grow through exceptional brands, premium-positioned brands, with a focus on quality, innovation, and service. To leverage our customer base, becoming more intimate with them over time. To drive operational excellence.
And then lastly, to utilize technology and data to differentiate our product line and our approach to our dealers, and as well as our customer base. We referenced the premium brands that are part of our portfolio, three in the RV space: Winnebago, Grand Design, and Newmar. Newmar, Craig didn't reference Newmar, but they are our luxury diesel Class A brand with price points between $300,000 up to $1.5 million. And then we also have the two marine brands, Chris-Craft and Barletta. We've become a much more diversified portfolio since our CEO took the reins in 2016. You can see that evolution in diversification, both in revenue as well as in our EBITDA or profitability over that time period, going from a largely motor home-based company to now a towable as well as motor home.
Then you can see the increasing influence that our marine portfolio has on our revenue and profitability. This is an interesting chart, and I'll make a couple points on it. It shows wholesale shipments for the industry in the darker bars, as well as then the retail performance for the RV industry over time. You can see we started in 2017, 2018, 2019, where retail was between 465,000 and 490,000+ units for that pre-COVID period. This is important just because we issued recently some long-range targets that were based on a mid-cycle.
Okay, and we have targeted our mid-cycle to be between 425,000 and 450,000 RV units, very much informed by that pre-COVID period, where it was between 465,000 and 490,000 units. So we think that that mid-cycle range is very reasonable, if not even conservative. I think you can see the spike that the industry enjoyed during COVID, and now, coming down off those highs, we've had calendar year 2023, which we show here, wholesale shipments just above 300,000 units, with retail slightly above 380,000 units. So a sizable destocking, we'll call it, in calendar year 2023, as dealers reduced their inventories very aggressively.
So now in calendar year 2024, we have the benefit of comparing against that destocking period that occurred in 2023, and we'll talk a little bit more about that, I'm sure, when we get to the Q&A with Craig. One of the things that we're noting about the industry is the what we call the stickiness of the industry, okay? Once people enjoy the outdoors and enjoy camping, they tend to stick around, okay? And that's what our survey suggests here as well. You can see on the left-hand side, the results of the survey that we did just recently, and the intentions that people who enjoy the outdoors and enjoy camping have of using their RV even more so in the coming year than they have historically.
So it just gives us another data point that gives us confidence in what the mid-cycle or the long term in the industry will look like. We've been taking market share over time. On the RV side, which is the left, we had about a 3% market share in 2016. Very surprising, considering the strength of the Winnebago brand that we only had 3% market share, but we weren't participating in the much larger part of the market, which is the towables market, back at that time. Then through the course of a couple acquisitions, most notably Grand Design and the great organic growth we had with Grand Design post-acquisition, as well as the more recently, the Newmar acquisition in 2019, we've grown that market share very nicely through the course of that eight-year period.
We peaked and have eased a little bit in market share through the dynamics that were created by that spike and now that trough that we're in more recently. But we have every reason to think that we're gonna increase that market share over time, and we'll talk about that with the mid-cycle targets. And then more recently, with the Barletta acquisition, on the right side of the chart, you can see the great ascension of market share that we have enjoyed through that brand. So these are the mid-cycle targets that we issued recently, and again, that is based on this RV mid-cycle of 425,000 units-450,000 units. Growing our sales in that mid-cycle to $4.5 billion-$5 billion.
Good expansion of gross margin as well as adjusted EBITDA, and then also free cash flow. Our market share, our non-financial targets, as we call them, down at the bottom, you can see growing to 13%+ on the RV side, 13% likewise on the pontoon side, which we now are starting to feel more and more could be a conservative number based on the trends that they've enjoyed. And then to continue to diversify the portfolio with non-RV sales growing as a percent of the portfolio. We're expecting strong margin growth. Not gonna hit big on this, but it reflects the targets that I just shared with you, as well as growth in cash flow as we become more efficient with our working capital, in particular.
We have this slide in the deck as well that shows our long-term performance since 2016, growing sales and profitability very nicely over this time period. You can see the spike that we enjoyed as an industry and as a company in those COVID years, but settling still nicely above the pre-COVID numbers of 2019, reflecting the success of the portfolio and the strategy across all these financial metrics. Our capital allocation is shown on this slide. First and foremost, we're going to grow the business. We think that we have a great opportunity to do so, both organically, shown on the left, just our investments. Most recently, we've announced the introduction of Grand Design into the motor home business.
I think a great example of our organic and intentional investment there, as well as the track record we've established now on adding great brands through M&A, and that strategy. The lower left shows our leverage ratio over time. Even with the acquisitions that we have done, we have managed our leverage ratio, appropriately, I think, and prudently, considering the cyclicality of the industries we participate in. Our targeted range there is 0.9-1.5 on an ongoing basis. We have stated we would spike that to as high as three for the right acquisition at the right time. You can see we've never really, gone to that level, through the course of the acquisitions.
It's been 2.7 or below, but our business generates a lot of cash, and so we're able to manage our leverage ratio accordingly. I see liquidity in the 250 million-300 million range, just on an ongoing basis. We do have an ABL of 350 million that we've never tapped. That's available to us at the moment. We also have a good amount of cash on the balance sheet. As you can see, as of our most recent quarter, we had over $240 million of cash as well. And then lastly, we return cash to shareholders as a priority as well. We've had about $90 million of share repurchases just over the last 12 months.
You can see we've had even greater share repurchases than that in the recent past. We had a $350 million share authorization from our board in 2022. So we'll continue to use both dividends and share repurchases as a means of returning cash to shareholders. And this is really our investment thesis. That's the last slide I'll use, and then we'll turn it over to Craig. We're a portfolio of premium brands. We have enterprise centers of excellence that we leverage in a very collaborative fashion, that provides synergies that we think we can tap into for margin enhancement. We're gonna continue to focus on technology as the means of differentiating and providing innovation into our products. We have an operating model that focuses on collaboration.
It's a highly variable cost structure, so that even in the periods of downturn or the trough, like we are in right now, we can support our profitability accordingly. We have a strong balance sheet. I just went over our capital allocation priorities for you. We have a strong balance sheet sitting here today that enables us to to act on our strategy. And then we feel we have a management team that's built credibility and proven that the strategy delivers good financial returns over time. So that's our investment thesis, and we wanted to close with that. And Craig-
Perfect.
I'll join you now for our Q&A session.
Yeah, thanks very much, Bryan. Really appreciate those slides. I think it sets us up well. We were talking as we entered the room, just, trying to get retail expectations set in the right way. I know on the last conference call, your CEO, Mike Happe, had talked about this potential inflection point we would be seeing at some point when retail would turn positive. I think we've had more than 30 months where month-over-month retail has been negative in the RV space. There was hope maybe it would happen in April or May, but where do you think that hope should be set today?
... Yeah, great question. You know, we've been tracking our internal sales, of course, but then also the commentary by other retailers, the dealer network, as well as other OEMs, and having constant conversations with our closest partners. Yeah, Mike did mention in May that that was his expectation, is that from an industry standpoint, we would turn positive in May. We're not seeing that. I'm not hearing that in our conversations with our dealers.
We continue to see year-over-year declines, and I think as a result, everyone in the industry, yourself included just recently, Craig, with your expectations being lowered for shipments in calendar year 2024, I think that that is a symptom of retail continuing to be soft as the end consumer still is just very cautious with their, with their dollar and, and particularly on, on consumer discretionary.
Yeah, and just for the record, what we did is we took our shipment forecast to 330,000 units, down from 350,000 this year. Last year, that was about 300 units and 10,000 units in terms of shipments.
Yeah.
But the retail was, what? 380 last year. So what it- essentially we're saying is last year was a big destocking year. This year is a small destocking year, which was maybe a little surprising. And maybe that leads to my question about dealer appetite for inventory. If you look at absolute units, inventory looks pretty good. It looks below maybe where we've seen at historical levels in absolute units, but in all of our dealer checks, dealers seem unwilling to maybe stock that incremental unit. Maybe talk about the dealer health and their appetite overall for, for inventory.
Yeah, we are seeing a very cautious dealer. We'll see how that... Your point on the one-for-one retail to wholesale equation. Wholesale is up year-over-year right now, as I think you know. Through April, it is up year-over-year, that's reflecting that destocking period last year. We'll provide some more comments in our call on June twentieth, but that one-for-one relationship I think is still feasible. We'll see how it plays out here over the next couple of months, and we'll provide some more guidance, as it relates to our full year expectations on June twentieth. I think the dealer remains very cautious, for the obvious reasons. Their carrying costs are higher, certainly with the interest rates being elevated, versus what they've been historically, and I think we'll continue to see a cautious dealer.
I think on the absolute number of units in the channel, we're in good shape on towables. Seems to be the message that is pretty prevalent across your dealer checks, as well as our conversations. I think motor home, they're still cautious to take inventory on, maybe a little bit elevated in motor home still. Dealers have been working very hard at pushing through units that are model year 2023s onto the retail customers, and they're doing that through support from OEMs in the form of retail spiffs, and we're continuing to see that, particularly on the motor home side. And then, since we're exposed to marine, I'll comment on that as well, 'cause marine, I think, is similar to motor home, that there's still some inventory in the channel that needs to be moved along.
So towables is in the best shape, and then motor home and marine, we see still needing a little bit of work to be done. The prior models, as a percent of what's on their lot, is still a little bit elevated, versus where it has been historically.
Could you talk about just the consumer trend and whether you're able to suss out any dynamic, whether it's the high end doing well, or that payment consumer may be struggling a little bit? What are the observations you can make with respect to demand?
Yeah, as I mentioned, there's still a pretty cautious consumer out there on durable goods. We've seen strength in the market, and I'm speaking again as an industry, strength in the market at the lower price points. We've also seen the higher price points remain pretty consistent. So our Newmar and our Chris-Craft business in particular, it's a small part of our portfolio and a small part of the industry, those are more cash buyers, right? And so as the stock market has been healthy, as individual, those wealthy consumers feel good about their position in their portfolios. They're willing to purchase still, but that is a small part of the portfolio. I think a lot of...
You know, we estimate 50%-70% of consumers finance their purchase of RVs or marine products, and so as a result, they're more cash cash flow-type buyers making these monthly payments, and so there's gonna be some caution there. In that type of buyer, that we're still seeing the lower price points favored.
Hmm. You had a slide, I think, talking about some of the broader survey work that you've done on RV consumers and maybe that outdoor consumer. Just shed a little bit of light on maybe the demographic profile of your customer base, whether it's in marine-
Yeah
... or in RV, and what strategies you have maybe to convert this avid outdoor consumer into these lifestyles?
Yeah.
I can take, for example, camping is enormously popular. It's mostly done in a tent. Is there a strategy to convert more of those tent campers into an RV, for example?
Yeah, we have a pretty full line. You know, I referenced Newmar and Chris-Craft being at the upper end, but we have, you know, with our pontoon brands, the ability now to get into the lower price points. Likewise, with the Winnebago and the Grand Design lineup, on the towable side, we do very intentionally cover those lower price points as well, and we've introduced new products. I mentioned earlier the preference for those lower price points. We've been very intentional with our new product introductions to make sure that we had a product portfolio that met the customer where they're at.
So Grand Design has introduced a couple of great new products, the Influence and the Reflection 100, to be specific and give examples, which are at those lower price points, which allow customers to get a lot of the features they're looking for at those lower price points. So we cover the full spectrum, and I think that that will help us weather the storm. Now, I will say, we are a premium-branded company, as I talked about earlier, so there's always this trade-off, and I talk often about this, this trade-off between margin and market share, okay? With a premium position, we're not going to compromise that during periods that we're going through, like now in the trough. We're going to be very disciplined in our production output. That is a different story than the broader market.
You know, we're a more disciplined company in our output, and we've been able to maintain a better margin as a result. But as we've done that, as we go through a trough as significant as what we are in right now, we will compromise a little bit of market share as we do that, even as we introduce these new products at the lower price points, to do our best to defend that market share. Barletta, likewise, we introduced the Aria brand, which brings Barletta into a full line now. Aria is that lower price point, and we've had a lot of success with it, but the market, that's about 40% of that pontoon market.
Mm.
So it's a great example of how we've introduced a new product, a new brand, to tap into a bigger part of the market and attract that, that entry-point customer.
So this is Fireside Chat. You can also submit me a question. Someone has done that. So Bryan, from the audience: "If the Fed cuts rates, will it change dealer behavior immediately, or will they take on inventory more slowly and be more cautious about those orders?
I think they're gonna be more cautious. Look, I think the speculation as to the rate reductions have you know been easing, obviously, as we've gone through this year. Maybe there'll be one or two, but even so, it'll probably be a smaller decline than what people had been counting on, maybe 25 points each. I don't see that having a really sizable impact or being, like, this sudden inflection point in dealer behavior when we see that first cut. That's my take. Craig, you probably have a position on it, too, but I think it'll certainly be welcome, right? For those rate cuts to be seen by the dealer network, it will give them some comfort.
Will also help hopefully spur some activity on the retail side, but I don't view that as some significant inflection point in dealer sentiment.
Yeah, I think we would say rates matter, but certainly, this is a seasonal business. You don't wanna take on inventory the end of summer, if that's when we get rate cuts, and then wait 12 months to move it. Also, the model year transition matters, and I think there was some hope going into the summer that, okay, dealers aren't gonna order anything that's a model year 2024 if they can get a model year 2025 by waiting a couple of months. So there's this, maybe this hope that early model year 2025 shipments would be better, but maybe the message you're sharing here is, like, don't expect a big change just because there's a big model year changeover. Is that fair?
Yeah, I think Model Year changeover will certainly be one of those factors-
Okay
... that, that helps the industry because I think, in the environment where they've been very cautious and conscious about the inventory levels they have on hand and, and pushing out those older model years, there has been this thesis that model year 2024s have been squeezed, and that when the new model year 2025s come out, and that happens in June, July time period, for those of you who may not follow the industry as closely, that that might provide at least a, you know, fresh reason for dealers to place orders. I think there's some truth to that, Craig, and that there's been a bit of a squeeze on model year 2024 as a result.
Look, I think, I think the other thing we haven't talked about, and, is something that I've read about at least and heard from certain investors, is that the uncertainty of the consumer is certainly partially, politically driven, too. You know, there's a lot of cautiousness about, you know, the political climate, and that we need to get through November, for example, just to know what we're dealing with, and I think that that will provide customers, just better confidence in making their decision.
I wanted to ask about Grand Design. You mentioned it earlier. So Grand Design was a very successful acquisition that you made, really-
Yeah
... catapulted Winnebago into the towable category, which is the largest part of the RV market and a place Winnebago didn't play seriously, as big, at least. Now you're gonna take Grand Design into motor homes. Talk about your total addressable market opportunity there and what would make for a successful launch in that category.
Yeah, so we've talked for some time now, in fact, since we made the acquisition, we've hinted that Grand Design would be a great motorized company at some point in time. We are moving forward. We've announced that we're moving forward now with Grand Design into the motor home space. We haven't quantified yet, Craig, our ambitions there. We know that Grand Design will be successful because the dealer network has been asking for a long time now for that entry into motor home by Grand Design. And so we do so with some confidence. Shipments will just begin here in our fiscal Q4, which runs June, July, August. And then we'll show some additional floor plans at the open house, which occurs in Elkhart County in September.
So look, we're really excited about it, because of the receptivity that we know Grand Design will receive there, and we've been very intentional also, and this is important, 'cause it's part of our operating model, very intentional about collaborating between Grand Design, the Winnebago brand, and to a lesser extent, the Newmar brand, because they're not as prevalent in that, Class C and Class B. But very intentional in the collaboration and the positioning of Grand Design's entry, to make sure that we take market share from, our competitive set rather than from the Winnebago brand. So, we're feeling excited about it, and I know that our end customers and our dealer networks is excited about that entry, too.
So we had another question from the audience: in terms of priorities for M&A, are you solely focused on adding new consumer brands, or are you also considering vertical integration investments to ensure competition among your supply base, much like one of your competitors has done?
Yeah.
Maybe as part of that response, you can also talk about Lithionics and the role that plays in your portfolio.
Yeah, yeah. I certainly will. Yeah, so if you look at our core business in RV, that's a very concentrated industry by ownership, as you've got the biggest players, Thor and Forest River, which collectively have probably 80% market share, and then you've got Winnebago, as you saw, at 11.5%-12%. So there's not a big part of the industry that's remaining for acquisition. It's new players, oftentimes in niche segments. We'll continue to look at those, certainly, if we think they're companies that are on their way from good to great and have excellent management teams. Marine is a more logical place for us to turn, given that it's a much more fragmented industry by ownership. So that will remain an opportunity for us.
As mentioned, we participate with Chris-Craft, which is a very niche part of the market, a small number of units sold each year. And then Barletta, which we thought was a big opportunity because that pontoon space we thought was showing good growth within that sub-segment, so we're really pleased with Barletta. We'll continue to look at other marine opportunities. Specific to the vertical opportunity, yes, we recently bought this company called Lithionics. It's a battery company that was focused on the RV industry, certainly has spill-over capability into the marine industry that we're pursuing, and it's sold to other industries as well.
That is a company that is allowing us to convert generator house power over to battery power, because we see that being a very real evolution that the RV industry and the marine industry are going through right now, for a lot of reasons. People don't want that generator out in their RV or boat. It's a nuisance from a sound perspective. There's a safety aspect to it, the fumes coming out of it, it disrupts the campground environment, so we see that transition occurring. It already is, and so we wanted to be positioned well with the Lithionics deal. Look, we'll continue to look at other vertical opportunities, so long as we see it allowing us to differentiate ourselves. There might be a financial reason to make an acquisition in a vertical play.
I just don't see the likelihood of that, as much as I do see a vertical that truly differentiates us, okay, and provides a strategic advantage as well as a financial advantage. So there are some consolidating moves, some vertical moves going on in the industry. But for us to pursue that and deploy capital in that area, it's likely gotta be for strategic reasons like Lithionics was.
Maybe with the final question to follow up on the M&A question, and you had mentioned Marine is a more fertile area for Winnebago, perhaps, going forward. That industry feels like it's also going through a cycle-
Yeah
... and probably has more inventory issues than currently exist in the RV industry. How do you frame the opportunity there, and how do you time your entry into the category so you don't buy into somebody else's, you know, inventory problems?
Yeah. Yeah, exactly. Well, I think that that has been the interesting part of the M&A opportunity over the past couple of years. You know, it's hard to find buyers and sellers agreeing on a price point as you go through the huge peak that occurred with COVID, and then you go through a trough. So buyers and sellers have different views of value in each part of that cycle. I think we'll start to see those values and that dislocation, rather, going away over the coming four-six quarters and some better opportunities at striking a deal. Specific to Marine, that's all part of that, my commentary there, right? As we go through the cycle, what is the right price that buyer and seller can align on?
Certainly, dealer inventory, you know, that the status of the inventory out in the channel is part of that equation, that we would value as it when it comes to determining price. I know you have Malibu coming up here at the conference, and that'll be an interesting conversation to hear them talk about the status of their dealer network as one of the main players in the marine space.
Right. That's a generous comment because the next meeting in this room will be Malibu.
Perfect.
Bryan, I wanna say thank you very much, and appreciate you showing up at our conference.
Yeah, thanks for having us, Craig. Thank you all. Appreciate your interest.
We'll have Malibu next in this room, and other-