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Winnebago Industries (NYSE:WGO) Q2 2019 Earnings Conference CallMarch 25, 2019 10:00 a.m. ET
Contents: Prepared Remarks Questions and Answers Call Participants Prepared Remarks:Operator
Good day, ladies and gentlemen, and welcome to the Q2 2019 Winnebago earnings conference call. [Operator instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Steve Stuber, director, financial planning, analysis, and investor relations. Please go ahead, sir.
Steve Stuber -- Director, Financial Planning, Analysis, and Investor Relations
Thank you, and good morning, everyone. Thank you for joining us today to discuss our second-quarter earnings results. I'm 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 the replay of the call will be available on our website later today.
The news release with our second-quarter results was issued and posted to our website earlier this morning. 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 thank you all for joining us this morning. We appreciate your time, and as always, your interest in Winnebago Industries. We would like to begin today's call in a place where we usually ended, and that is by thanking the more than 4,500 team members of Winnebago Industries who work extremely hard every day to create lifetime advocacy for our end customers. They accomplish this through the delivery of high-quality, innovative, differentiated products and by working in collaboration with our hundreds of RV and marine channel partners to provide superior customer service and aftermarket support.
Bryan, Steve, and I have the privilege of being the messengers on calls like these as we describe the team's tremendous progress on our journey to be truly a leader in outdoor lifestyle solutions around the globe. It is our people that make all the difference as we grow. And to those channel partners just mentioned, thank you for your support of our Winnebago, Grand Design and Chris-Craft brands. In many ways, you are the foot soldiers for our brands daily in the market, and it is your commitment to our mutual end customers that ensures an extraordinary experience as they travel, live, work and play in the outdoors.
Thank you to our employees and to our dealer partners. Now this morning, we would like to begin the call with an overview of our second-quarter results and our perspective on the balance of fiscal-year 2019. I will then turn the call over to Bryan Hughes, our chief financial officer, who will provide more detail on the related second-quarter financial results. Then I will return to offer some closing comments before concluding the call with Q&A.
Overall, we are pleased with the strong start in the first six months of fiscal 2019. Wholesale market conditions, especially in our RV segments, are even tougher than we had originally planned, but we are gaining material consolidated retail and shipment market share as a company. As we move into the second half of the year, we will look to build on the momentum we created through all of our business segments. We are committed to driving higher levels of profitability and asset utilization, delivering sales results that continue to outpace the industries we serve and pursuing new growth opportunities that position Winnebago Industries and its brands for future success.
We are both simultaneously investing in the ability to grow, whether it is talent, expertise or through business development work, and creating a more efficient organization operationally. We remain committed to meaningful, consistent market and financial progress in the short term, but we are truly focused on creating a long-term business model with a high-performance engine for profitable growth in the years ahead. And as a more diversified company focused on quality, innovation and service, we will continue to make solid progress toward our goal of transforming Winnebago Industries into a premier outdoor lifestyle company. While the North American RV industry is experiencing some challenging wholesale headwinds, the unique strength of our two RV brands, Winnebago and Grand Design, and their positions in the market has allowed us to dramatically outpace the industry.
And we are seeing small but strategically important benefits from our new marine play in Chris-Craft. Consolidated second-quarter net revenues were down 7.6% for the quarter driven by dealer inventory rationalization in the RV space and comparing against strong shipments in the prior year. What I am most pleased with is our growing RV retail market share. SSI retail in the stand-alone month of January 2019 showed our company with a market share position of 10% in RVs.
This is significant progress, in fact, three times greater from a position of under 3% just three years ago. Although we saw a decrease in our organic revenue growth, we made further progress increasing our gross profitability. Consolidated gross profit margin increased 100 basis points in the quarter driven by revenue mix, operational improvements within our Motorized segment and the continued success of our cost mitigation efforts to more than offset rising input costs and heightened dealer incentives due to market conditions. Thanks to our discipline in managing our portfolio by controlling production pace and overall output and our team's efforts to safely navigate the challenging weather during the second quarter from which we lost many production and shipment days across our various businesses, year-to-date operating cash flow increased over 200% versus last year.
Now turning to the segments in more detail. In our Towables segment, unit shipments for the quarter were down 10.4%. While the decline is certainly a reflection of broader industry dealer destocking and a strong comparable period a year ago, this result far exceeded the broader towable market, which has been declining nearly two to three times that amount during the comparable period, and demonstrates our success in continuing to gain dealer lot share. Our brands, though, have not been immune -- have certainly not been immune to the inventory corrective behavior.
For the quarter, Towables revenues decreased 5.9% from the fiscal 2018 period driven by the unit shipment declines mentioned previously, but partially offset by pricing taken during the second half of fiscal 2018, and again, in the early part of calendar year 2019. Adjusted EBITDA margins decreased by 20 basis points, largely reflecting a competitive pricing environment and increased cost input pressures. Towable backlog for the quarter declined 5.7% in dollars over the prior year, reflecting the positive impact of utilizing additional capacity added during calendar 2018 and dealers continuing to rightsize their inventory levels. Our dual-branded towable RV lineup continues to outperform the market due to the strength of our products and their increasing appeal with customers.
New towable products were once again on full display at the recent RVX show in March in Salt Lake City, including the new Grand Design Transcend XPlor and new floor plans for the Winnebago-branded SPYDER toy hauler and Micro Minnie Fifth Wheel. Given our strong showing at the RVX event and positive dealer feedback, we continue to expect our retail prospects to remain strong and for towable segment sales to outpace the industry. Turning to the Motorized segment. We remain focused on revitalizing our Motorized business and are taking steps to improve our ability to supply dealers and our end customers with a stronger lineup of high-quality innovative products.
Revenues for the segment were down 17.3% versus the prior year, and adjusted EBITDA margins were down 30 basis points. The current industry environment has certainly weighed on our ability to grow the top line, but we continue to focus on managing costs, product mix, implementing operational improvements to improve overall manufacturing efficiency and offsetting higher input costs, all of which have led to stabilizing margins and even an increase on the gross profitability line. What I am most pleased with regarding our recent Motorhome performance is that stand-alone retail results for Winnebago-branded Motorhomes in both December and January were positive on a year-over-year basis. This is a sign of good progress.
As you've heard me say before, energizing our Motorized business remains a top priority for us as we have dedicated a considerable amount of energy and resources to this effort. This includes our recent, difficult decision to shift our Winnebago branded Class A diesel motorhome manufacturing from our Junction City, Oregon plant to our manufacturing campus in Ford City, Iowa. This strategic transition consolidates and centralizes product development, supply chain and assembly operations for the company's diesel and Motorhome business back to a single location, improving our overall efficiency in the future. We have ample space, access to labor and full intent to begin a market share recovery and profitability as set in this business.
In terms of our Motorized backlog, we did see a 38.6% decline from the prior year, which reflects dealers continuing to rightsize inventory levels and prior year Class B new productship backlog timing. The RVX event in Salt Lake City also unveiled several new motorhome models for Winnebago, not currently included in the second-quarter backlog numbers. The new Class B Boldt, the select edition National Park Foundation Class B Travato and the refresh Class C View and Navion series were just several of many positive product upgrades that dealers had the opportunity to review several weeks ago. Turning to our other segment.
We saw another full quarter of Chris-Craft boat sales in our earnings results. We continue to see strong traffic and demand for our marine products as demonstrated by the turnout we saw at the Miami boat show in mid-February which exceeded our expectations. Consumers are showing tremendous interest in the Chris-Craft brand and its recent new products, specifically the 28 and 35 GT Launch and the Catalina 27 pilothouse, and it is translating into positive sales and shipment trends for that brand. Lastly, our specialty vehicles segment is being overhauled strategically to grow profitably as well in the future.
We have shared our intentions in prior calls to focus on several segments: accessibility enhanced, electric vehicles, and mobile specialty medical. We are investing in new talent, new capacity, and new technology. Our all-electric commercial vehicle platform recently received a top award at the RVX trade show in the sustainability category. With that overview, I will now turn the call over to Bryan Hughes to review our fiscal 2019 second-quarter financials in more detail.
Bryan?
Bryan Hughes -- Vice President and Chief Financial Officer
Thanks, Mike, and good morning, everyone. Second-quarter consolidated revenues were $432.7 million, a dre -- decrease of 7.6% compared to $468.4 million for the fiscal 2018 period, driven by a decrease in RV unit sales and partially offset by the addition of Chris-Craft and pricing actions taken during the last 12 months across all of the RV business units. Gross profit was $66.4 million, a decrease of 1.8% compared to $67.7 million for the fiscal 2018 period. Gross profit margin increased 100 basis points in the quarter, driven by favorable revenue mix, pricing and Motorized operational improvements, which more than offset inflationary cost pressures and heightened dealer incentives.
Second-quarter operating income was $28.9 million, a decrease of 18% compared to $35.3 million in the second quarter of last year, driven primarily by the decline in RV unit sales, unit sales. Growth in SG&A during the quarter, partially driven by ongoing and one-time investments we are making in the business, also contributed to the decline at operating income. Some of the one-time investments referred to is a continuation of the strategic project that was discussed as a driver of the SG&A increase in our first quarter. This, combined with the Chris-Craft acquisition and associated amortization, contributed 12 percentage points of the 16% increase in SG&A in the quarter.
Net income of $21.6 million, a decrease of 2.2% compared to last year, was favorably impacted by discrete tax items totaling $2.5 million or $0.08 earnings per share. Earnings per diluted share were $0.68, a decrease of 1.4% versus 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 $34.5 million for the quarter compared to $39.4 million last year or a decrease of 12.4%. Now turning to the individual segments, and starting with the Towable segment. Revenues for the second quarter were $250.7 million, down 5.9% year over year. This decrease was primarily driven by continued dealer network efforts to reduce inventory levels.
We are also comparing against extremely strong shipments in the second quarter of last year. Segment-adjusted EBITDA for the second quarter was $33.6 million, down 7.3% from the prior year. And adjusted EBITDA margins decreased 20 basis points, reflecting enhanced price advances over the past year that did not fully offset inflationary input cost, most notably materials. Turning now to motorized segment.
Motorized revenues were $164.7 million for the quarter, down 17.3% versus last year, driven by a decrease in Class A and Class C unit sales, partially offset by strong shipments of our Class B products. Pricing also impacted sales, but some of the benefit of the pricing actions we have taken over the past 12 months were offset by higher dealer incentives in the quarter. Segment adjusted EBITDA was $4.4 million for the second quarter, down 23.4% year over year. Adjusted EBITDA margin decreased 30 basis points driven primarily by the decline in sales and further impacted by investments in SG&A, partially offset by favorable product mix related to the strength of Class B relative to Class A and Class C.
Turning to our balance sheet. As of the end of the second quarter, the company had outstanding debt of $276.9 million, net of debt issuance costs of $6.4 million. Working capital was $175.3 million. Our current net debt-to-adjusted EBITDA ratio was 1.6 times, just above our targeted leverage ratio range of 0.9 to 1.5 times.
Cash flow from operations was $51.9 million year to date, up $36.9 million or approximately 250% from the same period last year. As we continued to execute our transformation initiatives, we are confident that the combined strength of our balance sheet and cash flow provide the flexibility to strategically invest in the business, and investing in the growth of our business remains our top capital allocation priority. The effective income tax rate for the second quarter was 12.8% compared to 27.2% for the same period in fiscal 2018. The favorable rate in the quarter versus last year was driven partially by the Tax Cuts and Jobs Act, which drove a reduction in the federal corporate tax rate to 21%, recall last year we used the blended rate, and also by identifying favorable discrete R&D-related tax credits.
This was made possible by our decision to invest in new talent in our tax function. And in doing so, we identified that we had an additional opportunity to capture further credits as endorsed by the tax code associated with our extensive R&D activities. Total discrete tax items contributed $0.08 to our earnings per share for the quarter. Including the 12.8% tax rate for our fiscal second quarter, we now anticipate our full fiscal-year tax rate will approximate 22%.
We currently anticipate under the current tax code that our ongoing rate for our fiscal-year 2020 and beyond will be approximately 23% to 24%. Finally, our board of directors approved a quarterly cash dividend of $0.11 per share payable on April 17, 2019, to common stockholders of record at the close of business on April 3, 2019. 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 you've heard us mentioned this morning, we are pleased with the progress we've made in our fiscal-year 2019, but we also recognize that there remain significant potential within our business for the future. Each quarterly report is not the final grade but a quiz on the way to hopefully a successful attainment of an advanced degree. At Winnebago industries, we remain steadfast in the pursuit of our vision around becoming a trusted outdoor lifestyle.
Our internal transformation efforts around talent, process, portfolio and capital allocation have not only advanced our competitive position in the industry, but they have also made our company more resilient, hopefully more consistent and able to better navigate the headwinds affecting the RV industry without surprising or dire consequences. It is always two steps forward and one step back during these early stages, and we aspire to much more in the future. This resiliency is due, in large part, to our new enterprise platform approach, which is more diversified than ever before with active, full-line RV, luxury marine and specialty vehicle operations. Just three short years ago, we were largely a one-division organization with Motorhomes representing 93% of our overall sales.
We are confident that over the next five to 10 years, there will be significant opportunities for organic share expansion and inorganic investment in each of those global markets. And as we said last quarter, we continue to search for premium companies with strong brands, great talent, valued channel partnerships that deliver on the product and a promises they make to further leverage our strengths and expand our business. Next, I'd like to share with you my thoughts on some of the market challenges facing both the RV industry and its retail prospects for the remainder of 2019. Although a sentiment in the broader RV market has maintained its bearish trajectory, we remain optimistic about the long-term retail prospects for the RV industry.
Secular demand for camping, being outdoors and generally collecting experiences versus possessions is continuing to grow across multiple lifestyle and demographic segments. The versatility and breadth of what is called a recreational vehicle continues to expand and brings more and more interest to the space. In the short term, there remains a good deal of macroeconomic noise as it relates to the RV industry. Recent industry reports clearly show a decline in RV shipments in the first part of 2019 due to dealer inventory rationalization, following unusually high seasonal orders in the previous year and retail that has slowed from years of double-digit compound growth.
Retail has likely been impacted by a variety of pressures: higher product prices as a result of increased tariff and material costs, higher interest rates due to increased fed fund costs from increases in the back half of calendar year 2018, volatility in the equities market, uncertainty about 2018 tax returns for the middle class and a general sense of anxiety by end customers as they try to determine where the economy is truly headed in the next year. As dealers are seeking to balance purchases with demand, they are selling through existing inventories and carefully managing the quantity of new orders for new product. They also recognize that most RV OEMs can now currently respond to new orders in a more timely manner. These developments impacted our overall sales during the second quarter, but it also served to validate the uniquely strong position our brands have in the market, which provides us some insulation from macro headwinds and definite opportunity for the future.
We believe that we are poised to capture incremental growth as we enter the 2019 retail season. Despite the inventory-related headwinds challenging the industry, there are several tailwinds serving as positive indicators regarding future sales and growth opportunities. Consumer confidence has remained relatively stable, and we are continuing to see our customers choose to invest their valuable discretionary resources on creating lasting outdoor experiences with family and friends. Reasonable fuel and oil prices continue to be a strong positive for our businesses.
Lastly, customers' access to capital and financing remains strong as financing companies have, for the most part, avoided abnormally constraining credit availability. The recent data from retail shows and certain sales data over the last several weeks has also been positive. We're seeing retail showed traffic and sales come in ahead of expectations as both were expected to be down during the first part of the year. This further demonstrates our resiliency and our ability to gain share and outperform our peers in a moderated market.
We are cognizant of the RV industry's wholesale shipment forecast for calendar year 2019 and support the association's forecast. We also continued to believe that flat retail for the whole of calendar year 2019 is a good aspirational target for the industry as we said during our last call. However, we believe retail will more
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