A Dealer’s Opinion On Winnebago and Newmar

I have to let it go. This Winnebago and Newmar thing. I want you to know that I have sought outside help and my therapist believes that I am making some progress but it will take time. Time to heal. Time to forgive.

Matt Miller, how could you do this!

Oops. Sorry. It comes out. The pain. The hurt. The betrayal.

I continue to read opinions on the deal even though, as far as I can tell, no one seems to have read Winnebago’s U.S. SEC Form 8-K to understand the specifics of the deal. And I get that. Not everyone wants to jump into that level of detail.

When a company borrows almost $300 million to make an acquisition and that company has to answer to shareholders, it is naive to think that the culture of Newmar won’t be impacted. It will. The only question is whether the impact is unduly negative, mildly annoying or downright positive.

Winnebago, Newmar and the dealer community understand that current Newmar owners are not very happy with the news. And that the negative reaction could really hurt future sales as a large percentage of existing Newmar owners are repeat buyers. And so the marketing of the deal begins.

The key messages?

Matt Miller is still running the company with the same executive team and the same group of employees. Newmar is still committed to its values around quality and customer support. The deal will help Newmar continue to grow and flourish.

Mount Comfort RV is very active on YouTube. Chris Anderson, in particular, is well known for his comprehensive video walkthroughs on Newmar coaches. I watched his video on a 2016 Newmar Dutch Star 4018 dozens of times while we were waiting for our coach to be built. The unit he showed was very similar to our coach.

This is the first video I have seen on YouTube that provides a dealer’s perspective on the Winnebago and Newmar deal. Ken Eckstein, the president of Mount Comfort RV, takes time to put out this video presumably to assure his current and future Newmar customers that all is not lost.

The spin from Winnebago and Newmar reminds me of what I used to deal with as a corporate executive. Whenever the senior team made a significant or controversial decision, we had to spend time on WSWSHH.

WSWSHH?

What Should We Say Happened Here.

The spin. The press release. How to manage the customer and employee response. We had a corporate communications group that specialized in crafting the specific FAQs and talking points all precisely documented in a comprehensive communication plan. All done before the news about the decision went public.

Just like the Winnebago and Newmar deal.

So, take it with a grain of salt. We will know within a year or two what kind of company Newmar will become after the acquisition. Better or worse? Again, we will know soon enough.

Here is another take on the deal by David Bott, a popular RV blogger with Outside Our Bubble:

My take has been captured in these posts:

Winnebago Acquires Newmar

NewWinnie

A Bit More On The Newmar Winnebago Deal

A Bit More On The Newmar Winnebago Deal

More on the Winnebago acquisition of Newmar? Yes indeed. A few more interesting details to put the deal in context.

I have been asking myself why Winnebago bought Newmar. Perhaps you have as well. Was this all part of a carefully mapped out business strategy from the Winnebago executives?

Let’s see shall we?

Saying it was part of the Miller family’s long-term plan, Newmar Corp. President Matt Miller said he first approached Winnebago Industries President and CEO Michael Happe in April this year to see whether the “Flying W” would be interested in acquiring the 51-year-old motorhome manufacturer based in Nappanee, Ind.

Great. So Matt had been shopping the company. Did he approach other companies? Likely. Newmar’s long-term plan was to sell out which, obviously, was never publicly disclosed. Winnebago just happened to be the company that said yes. Interesting that Newmar initiated the discussion.

For all of the people posting on Facebook that Newmar will stay the same, let’s take a look at a recent Winnebago news release.

FOREST CITY, Iowa, Feb. 04, 2019 (GLOBE NEWSWIRE) — Winnebago Industries, Inc. (NYSE: WGO), a leading outdoor lifestyle products manufacturer, announced plans today to shift Winnebago-branded Class A diesel motorhome manufacturing from its Junction City, Oregon plant to its manufacturing campus in Forest City, Iowa. The strategic manufacturing transition consolidates and centralizes product development, supply chain, and assembly operations for the Company’s diesel motorhome business to a single location. This decision will enable the Winnebago Motorhome business to improve its ability to efficiently and consistently supply dealers and end customers with a stronger line-up of high-quality, innovative diesel products.

Further along the news release, we read the following:

“While the strategic purpose of the Company’s decision to move diesel manufacturing to Junction City years ago was well intended as a means to acquire additional motorhome assembly capacity and tap into an experienced RV workforce in the Northwest, we have not achieved our targeted operating efficiency and profitability goals,” said Brian Hazelton, Vice President and General Manager, Winnebago Motorhome Business. “This difficult decision to relocate diesel manufacturing back to Forest City, Iowa and centralize our diesel business value chain geographically is necessary. It will enable more effective product development, enhance profitability through increased manufacturing efficiency and sourcing savings, and most importantly result in being a more reliable supplier to our diesel dealers and end customers.”

There it is. The management imperative. It was necessary to centralize their diesel business value chain geographically to achieve operating efficiency and profitability goals.

It will be interesting to see if Winnebago management takes a similar approach with Newmar. They could, I suppose, move everything to the existing Newmar production facility. Or they could have multiple production facilities which they had tried before without achieving the targeted operating efficiency and profitability.

My old company, the Bank of Montreal and BMO Capital Markets, was part of the deal. You can read the entire agreement on Project Sunrise here.

In connection with execution of the Purchase Agreement on September 15, 2019, Winnebago executed a commitment letter with Goldman Sachs Bank USA, Bank of Montreal and BMO Capital Markets Corp. (the “Commitment Letter”).

Looks like Winnebago will borrow a fair amount of money to do the deal. The debt appears to be up to $290 million. The Winnebago management team will be under a bit of pressure to make the deal work.

In connection with execution of the Purchase Agreement on September 15, 2019, Winnebago executed a commitment letter with Goldman Sachs Bank USA, Bank of Montreal and BMO Capital Markets Corp. (the “Commitment Letter”). As set forth in the Commitment Letter, which is attached hereto as Exhibit 10.1, it is intended that Winnebago will (a) obtain up to $290.0 million in gross cash proceeds from the issuance of senior secured notes (the “Senior Notes”) and/or (b) if Winnebago does not, or is unable to, issue the full amount of the Senior Notes at or prior to the time of the closing of the acquisition, a senior secured bridge facility in an amount up to $290.0 million minus any gross cash proceeds received by Winnebago from the issuance of any Senior Notes or other securities.

Nothing like a little bit of debt to look at “synergies” to “maximize operating efficiencies”.

I have access to a few analysts that cover Winnebago (WGO XNYS). Here is what one of them had to say:

We are raising our fair value estimate to $37 from $33 [a share] after incorporating the company’s Sept. 16, 2019 announcement that it will acquire premium motorhome maker Newmar for about $344 million. The increase comes from a 40-basis-point increase in our midcycle EBIT margin to 8 percent which reflects Newmar’s EBITDA margin of 8.4 percent being 430 basis points higher than Winnebago’s motorhome segment margins.

Translation? Newmar was making more money on its motorhomes and that increases the fair value of the Winnebago shares.

And the view on Winnebago’s ability to execute?

Winnebago expects immediate EPS accretion, as do we.

However:

Management is targeting a 10% operating margin by fiscal 2020 which we think may not happen by then due to cyclical risk beyond management’s control.

During 2008 and 2009, Winnebago’s revenue fell by 31 percent and 65 percent respectively. Their gross margin in 2009 was an incredible negative 14.5 percent! And this analyst believes that the cyclical risk, meaning a downturn for the RV industry, is coming soon.

A few other details about Winnebago. Michael Happe, a relatively new CEO hired from Toro, brought in eight of his nine direct reports as either new to Winnebago or new to the role. Winnebago has a 10-10-10 plan for fiscal 2020: increase the North American RV share to 10 percent via organic growth, realize an operating margin of 10 percent and obtain 10 percent of revenue from RV segments or other outdoor businesses that the company is not in presently.

I’m still not happy about this deal but it is what it is. Miller wanted to sell Newmar and he went looking for a buyer.

Winnebago has ambitions to reach some aggressive financial goals and that will have a significant impact on what was once Newmar.

Winnebago did not go into debt to buy Newmar simply to let it continue to operate as an autonomous entity.

They have their goals.

10-10-10.

NewWinnie

Newmar. Winnebago. NewWinnie. Very few happy campers. After reading through thousands of online comments on a variety of social forums, the vast majority of Newmar owners do not appear to be very pleased with the Winnebago acquisition of Newmar. Most are angry and upset.

The negative reaction from so many Newmar owners resulted in this post from Newmar on their corporate Facebook page:

Thank you to all who have openly and honestly shared your thoughts about the acquisition of Newmar by Winnebago. We understand why you have questions about this change, and we always appreciate hearing from our customers.

We want to assure you that we remain deeply committed to our founding values of courtesy, fairness, integrity, morality, reasonableness, and reliability. These values have guided us ever since the Miller family purchased Newmar in 1984 — and they always will.

Another constant during this transition will be our leadership, as Matt Miller will remain the President of Newmar Corporation. Working closely with the existing executive management team, he will guide the company into the future with a steady hand.

Please know that you can continue to count on Newmar for unmatched quality of product, great product value, and the best customer service and parts support in the industry. We have great confidence in Winnebago’s track record of supporting what makes their brands unique, and we believe this acquisition puts us on the best path to continued innovation and success.

As always, we are honored to have you as a part of the Newmar family.

The post was accompanied by this photo:

Matt Miller sent out a letter to all of his employees as I am sure they have a few questions about this change.

During my career, I went through two major acquisitions. In the first one, we acquired a company with 3,000 employees. In the second one, our company was acquired. I’ve been on both sides of an acquisition and the business imperatives were identical: deliver value to the shareholder. Quickly.

Unlike Newmar, Winnebago is operated by professional business managers that report to a board. The professional business managers that work for Winnebago will have no particular passion for the RV industry. I doubt that many of the executives that run Winnebago have even owned an RV.

Michael Happe, the CEO of Winnebago is an MBA, a professional business manager. He has been CEO at Winnebago for a little over 3 years. He spent much of his career before Winnebago at Toro. Toro builds turf maintenance equipment, snow removal equipment and irrigation system supplies. Oh, and lawn mowers.

He was hired by the board for one primary reason: build value for the shareholders.

Simply put: make money.

Yes, that includes paying attention to the basics of offering products to the market that customers will buy. But there is no requirement for the professional business manager to be passionate about the RV lifestyle.

This is not the same passion for the RV lifestyle that Newmar has lived over the past 35 years. When a family owns a business, it is intensely personal. When shareholders own a business, it is, well, a business.

Make money.

The typical acquisition playbook used by professional business managers is pretty straightforward. There are two basic drivers for an acquisition: boost current performance and/or reduce costs.

Based on what I heard from the Winnebago analyst call yesterday, Winnebago management appears to want both.

The only way to lower costs effectively is when the acquiring company has high fixed costs. Winnebago takes certain resources from Newmar into its existing model and shuts down the rest. I suspect it will begin with redundant corporate functions like legal, finance, HR, IT. Sure, a few folks in these areas might hold on but most will find that their roles will be eliminated as part of driving operational “synergies” between the parent company and the acquired company. Winnebago will quickly move to contracts and purchasing. Larger economies of scale provide opportunities to revisit supplier contracts and find ways to reduce costs either by switching suppliers to a lower cost provider or renegotiating contracts at better pricing. And, no doubt, component manufacturing will be reviewed for “synergies” between the disparate business units building travel trailers, RVs and, yes, water boats (Winnebago acquired Chris Craft, a manufacturer of boats). Customer service? Engineering? Sales? Professional business managers will comb through every function to identify opportunities to reduce costs.

This acquisition playbook has a fancy name, leverage my business model or LBM. You really only have two choices: get higher prices or reduce costs.

Michael Happe’s first task will be to deliver the short-term results shareholders expect as part of the acquisition. He said as much yesterday in his conference call:

“…this acquisition enhances the scale and profitability of Winnebago’s overall motorhome business and greatly improves our cash flow generation, which we expect will translate to immediate accretion to the fiscal 2020 cash EPS.”

If he doesn’t hit his financial targets, Winnebago stock will be punished. The easiest way to get there is to reduce costs. Getting higher prices may not prove sustainable in a downturn cycle and generally boosting performance takes a lot more time to achieve.

Perhaps this might help provide a bit more perspective on what corporations do when they acquire companies. This example is from Thor, the largest RV company in North America, and their acquisition of EHG, a large European RV company, which closed in February of this year. You might find the material a tad, well, detached from the passion of owning and operating your RV. And that is the point. Thor’s acquisition was all about improving margins and profitability. The exact same motive for Winnebago.

“With the inclusion of EHG into our operations in the quarter, we continue to focus on integration and the sharing of best practices that will drive long-term improvements in margins and profitability for our overall business,” said Colleen Zuhl, Thor’s Senior Vice President and Chief Financial Officer. “As we review our cash priorities, our main focus is to utilize free cash flow to reduce overall debt levels, which were reduced by $40 million during the quarter. Subsequent to the end of the quarter, we fully paid the remaining $60 million outstanding on the ABL facility, and made payments of approximately $155 million on our term loan. To date, we have made total principal payments of approximately $255 million towards our original ABL and Term Loan B debt balances. As we generate future cash flow, we will balance our strategic goal to invest in the continued growth of our business along with the financial goals of reducing our net debt level and returning cash to shareholders.”

With the completion of the EHG acquisition, Thor’s management team remains focused on creating long-term shareholder value by supporting both the integration of EHG, and the Company’s growth in North America. To help drive that growth the Company recently announced the creation of two new senior management positions at Thor Industries in North America to provide incremental support to subsidiary leadership and help achieve key goals on an accelerated basis. The Company has elevated two of its top RV leaders, Matt Zimmerman of Keystone and Chris Hermon of Heartland, to the newly-created roles of RV Group Managers. In their new roles, Matt and Chris will be assisting Thor’s North American operating companies in their realization of key strategic initiatives, all of which are designed to improve the Company’s offerings to its dealers and retail customers, increase engagement with its employees and improve its operating margins.

“During the remainder of our fiscal 2019, we expect the North American dealer inventory rationalization will continue, but we expect to see a resumption of growth in the North American markets in 2020. In Europe, we believe our dealer inventory levels of EHG products, while elevated in certain locations, are generally appropriate for seasonal consumer demand in Europe and are progressing towards more normalized levels,” added Bob Martin. “Currently, our focus is on identifying and realizing the benefits of sharing best practices and operating efficiencies across Europe and North America, and continuing to optimize our working capital management processes.”

“Having completed the EHG acquisition, we are now beginning the hard work of realizing the full value of EHG to our Company,” commented Peter B. Orthwein, Executive Chairman of Thor. “With the strong industry fundamentals and demographic tailwinds, we are confident that our strategic expansion into the European RV market will contribute to Thor’s long-term growth, and provide the strong cash flow and returns on investment that our shareholders have come to expect from Thor.”

Although I appreciate Newmar trying to signal to its customer base that things will stay the same, that the DNA of the company won’t change, it already has. There is a new owner that is accountable to shareholders. And the shareholders want better margins and more profitability.

Make money.

Newmar’s DNA will end when the deal with Winnebago closes. Sure, it might look the same for a little while, but the culture will be assimilated.

Just like the Borg.

Resistance is futile.

That is why we have terms like “selling out” to describe these types of changes. And that is why so many Newmar owners are upset by the news.

Newmar is gone.

Winnebago Acquires Newmar

Say it isn’t so. Newmar is now owned by, ahem, Winnebago?

I just finished the conference call held by Winnebago Industries’ CEO, Michael Happe. The call confirms my concern about this acquisition. Newmar’s fate is sealed. It will be another cog in a faceless corporation to drive value to shareholders.

Sad. So sad.

I guess if someone offers you $344 million in cash and stock, you take the deal, especially when you see the potential for a really bad storm on the horizon.

This was Newmar, in case you did not know:

At Newmar, we’re passionate about RVs because we have a passion for the RV lifestyle, and every single one of us takes pride in creating world-class motorhomes that represent the hardworking people of Nappanee, Indiana.

Through our commitment to customer-driven innovation and precision craftsmanship, we build superior-quality Class A motor coaches, each engineered and appointed to deliver you and your family with a positively residential experience day after day, year after year.

And what is Happe’s perspective on the deal? Let’s digest the corporate bingo words shall we?

… this acquisition enhances the scale and profitability of Winnebago’s overall motorhome business and greatly improves our cash flow generation, which we expect will translate to immediate accretion to the fiscal 2020 cash EPS.

In addition in the same way we approach driving continuous operational improvement through our acquisition of Grand Design, we believe that Newmar’s experienced leadership team and their team across their company along with their strong manufacturing processes will create opportunities to drive synergies across the whole of our motorhome segment. At the same time, we also feel confident that the terms of our agreement allow Winnebago Industries to maintain ample balance sheet flexibility to continue investing in our business, while quickly deleveraging and delivering value to our shareholders, even in a challenging macro market.

Okay. So the deal is about immediate accretion to cash EPS and operational improvements, synergies and, of course, the ultimate objective to deliver shareholder value.

A few interesting details about Newmar came out during the conference call.

In the last 12 months, Newmar generated revenue of $661 million with an adjusted EBITDA of $55.2 million. Not bad. They have seen compound annual growth rates of roughly 20 percent since 2013. Impressive. Although the specific margins were not disclosed in the call, they were characterized as being much higher than the Winnebago products.

Matt Miller, President and CEO of Newmar will report directly to Michael Happe. For how long? We shall see.

There was a lengthy discussion on how Newmar has fared in prior down cycles. I guess the analysts covering Winnebago must know something about what might be coming soon to the RV industry.

The short answer, not all that well. The upcoming downturn may be different (apparently) due to variability of Newmar’s cost model. Newmar has maintained a cost structure that is roughly 90 percent variable. Which means they can manage those variable costs by managing capacity. In effect, reducing the labor element and reducing production. Almost all of the current production going down Newmar’s manufacturing line has someone’s name on it. A dealer or a customer. Newmar does not build open stock or open inventory. They build to order.

Winnebago had less than 3 percent share of the North American RV market in 2015. When the deal with Newmar closes, it will be in the double digits. The RV market is basically a duopoly between Thor and Berkshire Hathaway (Forest River).

I have to say that I am very unhappy with the news. Publicly traded corporations seek ways to maximize shareholder value by cutting costs and increasing margin. Winnebago does not strike me as a customer-focused firm that will go the extra mile to ensure customer satisfaction. I’ve not been a fan of their products. They lack experience in the premium segment of the RV marketplace.

Not a happy day for this Newmar owner. Except for one thing though. I suspect our resale value may go up once Winnebago starts driving synergies in the motorhome segment.

Battery Disconnect Switch

There is one switch in our coach that glows red all of the time. As far as I know, this switch has never been used. Probably because the ominous glare of the red light is so frightening, particularly at night.

Not hard to miss when you open the command panel. A piercing red light beside a switch with the label BATTERY DISCONNECT.

Newmar seems to overlook even the most basic industrial design practices. Newmar elected to use a momentary rocker switch for the battery disconnect. Looking at the switch, the operator will not be able to determine whether the battery disconnect is ON or OFF. The switch stays in the middle position. And what is the purpose of the red light? If the red light is on, does that mean the BATTERY DISCONNECT switch is on? Or is it off?

And why would I need to use the battery disconnect switch?

I have 65 manuals for our coach all digitized in Evernote for easy access and reference. There is but one mention of the Battery Disconnect switch. And this is what it says:

Battery Disconnect Panel

The battery disconnect panel for house batteries is located above or near the entrance door. There are two switches on the panel. The top switch is used to measure the battery voltage. The lower switch is used to disconnect the battery when the unit is stored for any period of time. Pressing downward disconnects the coach batteries, not the chassis batteries. This is done to prevent the coach batteries from being drained during storage. It disconnects all of the 12 volt circuitry from the batteries, with the exception of the LP detector. When taking the unit out of storage, press upward to re-connect the batteries. This will make the 12 volt system ready for use.

Depending on the chassis of the coach, diesel pusher motorhomes may be equipped with a second disconnect switch strictly for the chassis batteries. If equipped, this “Master Kill Switch” may be located in the rear engine compartment. This switch disconnects all power to the coach so that it cannot be started. It is used to prevent accidental ignition when the engine is being serviced.

“There are two switches on the panel.”

There is only one switch for the battery disconnect panel.

“Pressing downward disconnects the coach batteries, not the chassis batteries. This is done to prevent the coach batteries from being drained during storage.”

This is the intended function of the battery disconnect switch. It disconnects the house batteries if you are storing your coach for longer periods of time and when your coach will not be connected to any form of shore power in storage. Pressing down will disconnect the batteries (OFF) and pressing up will re-connect the batteries (ON).

“It disconnects all 12 volt circuitry from the batteries, with the exception of the LP detector.”

We have an all electric coach and we do not have a liquid propane detector. And there is some debate on the forums as to whether some devices still draw power from the house batteries even when the battery disconnect is activated (e.g., smoke detectors).

We have stored our coach for several months over the years. I made sure that we had power to the coach in storage and I would go in and check the water level of the batteries on a regular basis.

A battery disconnect is a simple and safe way to disconnect the house batteries. No need to get out to the battery bay and remove battery leads. It is used when storing the coach without a source of power. It could be helpful for certain types of electrical work although I would prefer to leave that decision in the hands of a knowledgeable electrician.