By Eric Smith
Winnebago Industries Inc. began its fiscal third quarter on March 1 with high hopes and enough momentum to fuel a fleet of motorhomes.
Not only was the Forest City, IA-based recreational vehicle and boat manufacturer coming off its market-shifting $344 million acquisition of luxury RV maker Newmar Corp. in the previous period, but the company had just completed a smokin’ second quarter that included a nearly 50 percent revenue increase.
What’s more, macro RV trends were improving, and the busy spring camping season was on the horizon. But just as Winnebago seemed to be sailing down the highway on cruise control, disaster struck.
Like it has for many companies, the coronavirus knocked Winnebago off course.
The company this week announced it will be temporarily suspending most production activities at the company’s Winnebago, Grand Design RV, Newmar and Chris-Craft facilities in hopes of “lowering the probability of coronavirus exposure to employees and adjust future production output relative to a fast-changing demand landscape for the company’s products,” Winnebago said.
On the fiscal Q2 earnings call with analysts, CEO Mike Happe provided some more color around the difficult decision to shutter operations just as spring and the prime RV season kicks off.
“Unfortunately, as of this past Monday, March 23, we made the tough but necessary decision to temporarily suspend most production activities across all campuses,” Happe told analysts on the call. “This will be a phased process throughout this week, and we expect full suspension of manufacturing to begin formally next week, which we project to last through April 12.”
Happe cited a couple of factors for the temporary shutdown. One, the health of Winnebago’s employees and their families. And two, “the significant and quick change in demand” for Winnebago’s products from both dealers and customers over the past several weeks.
After all, during these challenging economic times, a sizeable purchase such as a motorhome or towable RV might not be the top priority for many Americans, meaning the coronavirus is a roadblock that shows no sign of moving.
“We felt both reasons together, necessitated the pause in production so that we can continue to assess appropriate next steps,” Happe said. “However, our company will remain open and perform as allowed by any state-mandated stay-at-home or shelter-in-place directives, central activities for our dealers and end customers, including remote retail support for the channel along with technical care, warranty administration and parts fulfillment. We will also continue to support the employees affected by this temporary production suspension by providing base pay and benefits for the next two weeks.”
CFO Bryan Hughes, during his remarks on Winnebago’s quarterly performance and outlook, noted that the company is financially secure during this temporary suspension.
As investment bankers recommended in SGB Executive’s recent look at M&A during the coronavirus crisis, and other companies such as VF Corp. have done, drawing down on revolving lines of credit is critical during this time of upheaval.
“We have access to a $193 million ABL (asset-based lending) credit facility that remains, at this point in time, completely untapped,” he said on the call. “We believe our cash position and our ABL provide a robust level of liquidity to allow us to meet our commitments over the duration of a reasonable shutdown period. We are working across Winnebago Industries and with our various stakeholders to mitigate risk, develop contingency plans, reduce costs and above all, keep our employees safe and our long term viability secure.”
While Happe and his leadership team expressed concern over long-term hits to the U.S. economy, they remain upbeat about Winnebago’s prospects once this crisis has been resolved, people go back to work and consumer confidence is regained.
After all, Winnebago provides access to the original isolation option—the outdoors.
“I strongly believe that the appeal of the great outdoors will outlast whatever period of disruption lies ahead of us, whether that is weeks or months,” Happe said. “We fully understand there could be lasting and real consequences of the economic disruption happening now in North America and around the world. And we will need to manage through those, whatever they may be. However, we feel that the North American consumer will stay safely engaged with outdoor recreation activities in both the short term and the long term.”
Happe added that the rise of social distancing in recent weeks could have lasting effects on Americans’ leisure activities of choice once fears over the coronavirus have passed.
“Some might make the argument that outdoor businesses will receive a material future boost as end customers reevaluate how they want to spend their discretionary time in the future, when social distancing practice may become more of a norm than they are today,” Happe said. “Camping, hiking, biking, boating, fishing, you name it, all of those activities and more are tremendous for families and friends to safely create extraordinary experiences and memories in the outdoors in the future. They will return in spades and consumers will invest in the future in the products they need for those activities.”
Moving forward, Winnebago said it hasn’t traditionally provided specific guidance on earnings calls, which Happe said the company wasn’t going to start doing this week given the “unpredictability of the future.”
But the company will have better insights into its financial picture over the next month as details of the stimulus bill become known and the virus is hopefully contained.
“The next 30 days will be critical for us to better understand the magnitude of our remaining opportunity for revenue and profits in fiscal year 2020 and clarity will be provided through a variety of external actions, including legislative decisions, fiscal policy action, government social interaction directives, medical developments and so much more,” he said. “Our view for these forward-looking thoughts has changed from fiscally and quarterly, to monthly and weekly, if not, daily. These are truly unprecedented times.”
Shares of Winnebago (WGO) were up at market close Wednesday and were trending in the low double digits in Thursday’s early morning trading and mid-single digits in midday trading.
Photo courtesy Winnebago