RV SuperShow Day 2

I attended a session with the Newmar executive team yesterday.

Kevin Bogan, Vice President of Operations for Newmar, chaired the meeting. Other Newmar executives present included Matt Miller, now a Vice President at Winnebago Industries reporting to Michael Happe, CEO of Winnebago (Matt remains as President of Newmar Corporation), John Sammut, Vice President of Sales (Newmar), Matt Utley, Vice President of Service and Facilities Development (Newmar), Ron Stichter, Vice President of Engineering (Newmar) along with a few other folks.

Kevin opened the session and, as expected, spoke about the acquisition by Winnebago. Kevin provided the standard talking points about how everything will stay the same for customers. Even better for the future.

Kevin then introduced someone else. Someone from Winnebago.

Ashis Bhattacharya.

This is how Ashis describes himself on LinkedIn:

I am a growth-focused business leader who has worked in multiple companies (Winnebago, Honeywell, Moog, Motorola Solutions, Bain & Co) and industries (Outdoor Lifestyle, Industrial Components & Machinery, Telecommunications) around the world. I presently work with Winnebago Industries, the world-renowned brand in RVs, heading strategy, acquisitions, advanced technology and I also head the Specialty Vehicles division of the company.

My approach to business starts with gaining a deep understanding of customers and markets, and using that knowledge to work with product development and marketing teams to develop differentiated offerings and marketing approaches. I am also a big supporter of customer insights research and human-centered design as a way to understand customers better.

At Winnebago, I have worked on closing 2 key acquisitions over the past couple of years, Grand Design RV and Chris-Craft. I work with the leadership and management teams to bring in a more strategic approach to business and growth. I have also led the introduction of an all-electric RV for short-range commercial applications. Digital customer engagement is an area of great passion for me.

From what I gather, Ashis is the point person from Winnebago to oversee the integration efforts with Newmar. Ashis is a peer to Matt Miller, as they both report to the Winnebago CEO.

It was interesting to me that Ashis felt compelled to speak to this group.

Don’t get me wrong. Ashis, although not as strong a communicator as Kevin or Matt, said all the right things. He came across as friendly and seemed focused on ensuring a good customer experience. But, at the end of the day, Ashis is just another MBA; a hired gun with no particular focus or passion about the RV lifestyle. He has been with Winnebago just over three years. He brings no prior experience or exposure to the RV industry. I doubt that he has ever spent any time using an RV.

Newmar is now part of a publicly traded business, accountable to shareholders. Things will change for the company. Hopefully for the better, but, knowing how public corporations work, especially those ones that are run by MBAs, I’m not so sure.

The format of the meeting was largely a Q&A session with the attendees. I did not learn much new except for Newmar’s plans to spin out a mobile service offering in a few select areas starting with Florida.

Later in the day, Lorraine and I spent time looking at the Newmar, Entegra, and Tiffin coaches. That was in between extended sessions talking with people.

In the Newmar section, we really loved the Essex. That was our favourite Newmar coach. In the Entegra section, well, let’s just say that Thor followed through on Bob Martin’s promise to decontent their high-end coaches (Bob is CEO of Thor). We would not buy an Entegra coach. Lorraine and I were really impressed with a 40-foot Tiffin Phaeton coach. Really well done with an expansive floor plan that seemed much larger than our coach. Nice bus. We also enjoyed walking through the Allegro Bus coaches.

We will be back to the show today. We will also be in a meeting with ITR, manufacturer of the OASIS heating system. I wonder if they have any spare pumps? I’ve already replaced two defective ones and I need to replace a third.

Third day dry camping. All good so far. We leave bright and early tomorrow morning.

Winnebago and Double-Digit Growth

Winnebago revenues are up. Way up. An increase of 19.2% for the Fiscal 2020 first quarter compared to the Fiscal 2019 first quarter. And organic growth of 12%. Impressive.

I’ve summarized the highlights at the end of the post if you have an interest.

I enjoy the earnings call. Both for the types of questions that the analysts raise and the careful wording of the responses by management.

Let’s check a few of them out, shall we?

We don’t talk about that.

Q. And then, I’m sorry, if I missed it, but did you talk about Newmar’s organic growth in the period that you own them or maybe even for the quarter, overall for the period?

A. No, we don’t disclose that. (Bryan Hughes, CFO)

The value side of Class A motorcoaches is a “struggle”?

Q. And then going forward in future calls, what are the markers that we could look forward and talk about some of the initial progress that will be made from having Winnebago and Newmar working together?

A. The Class A business is obviously where the accretiveness from the Newmar acquisition will take hold in total. It will allow us to become more selective with the Winnebago brand about where we want to play with Class A gas and Class A diesel underneath our flagship brand. We continue to see the efficiency there on that segment versus the rest of the industry. I will tell you though, the entire industry is struggling on the Class A value side of the equation. (Michael Happe, CEO)

Er, only $5 million savings on a $1.2 billion cost base? Really??

Q. Okay, perfect. Thank you for that. And just finally, and I think, Mike, you talked about some of the teams from Newmar and the Motorized — the Winnebago motorized team are starting the integration work now, and at the time you made that acquisition you were looking for $5 million synergies over three years, has that picking changed at all, because if you look at these two businesses together you’ve got a $1.2 billion cost base and you’re calling out $5 million in savings, that just seems at the surface pretty low. Has there been any change in that thinking and any sense of when you might update that?

A. I will be very honest with you, we need to be able to exceed that number. (Michael Happe, CEO)

We have lots of Newmar coaches in stock!

Q. Okay. And then just more of a housekeeping item on Newmar, I think Bryan you gave us what the backlogs were excluding Newmar, but any sense of what the inventory — the inventory for Motorized at quarter end was with Newmar?

A. Sure. Yes. So Mike, real quick. So Newmar we had about 1,400 units, 1,420 units of field inventory related to Newmar. So our reported number was 5,169, of that 1,420 units were Newmar. (Steve Stuber, Investor Relations)

Let’s remain humble and paranoid.

Q. Good morning. Thanks for taking my questions. Just two quick ones here. So, can you talk about the integration of Newmar, how that’s been going? And maybe, have there been any issues or any early lessons that may have been learned?

A. So, very early in the process, we have strong aspirations, but we also need to remain both humble and paranoid that if you don’t keep your head down on an integration like that, that something could surprise you, but nothing to report as of late. (Michael Happe, CEO)

And this one isn’t about Newmar. It is about Winnebago’s Class B products.

B stands for Bumpy. Or maybe Bad (as in bad product quality). But let’s not call them out by name. We’ll just call them “the vendor”.

Q. And also with regards to incoming chassis, the quality issues, are we in the later innings of these issues?

A. As it relates to which inning might we be in, we’re working I’d say very productively with the vendor. I think that we’ve made progress with them. I think it will continue for the foreseeable future here as we work through issues with them. And so we’re not prepared yet to call that we’re in the late innings of this journey. Some of these issues are certainly deep-rooted or systemic, and like I said, we’re working very productively with them. But more work to be done, I would say. (Michael Happe, CEO)

Here are the highlights for the first quarter.

Revenues for the Fiscal 2020 first quarter ended November 30, 2019, were $588.5 million, an increase of 19.2% compared to $493.6 million for the Fiscal 2019 period.

  • Winnebago’s towable segment achieved a sales improvement of 16.5%, to $341.3 million, mostly from rising sales of the Grand Design RV brand.
  • Motorhome segment revenue increased by 24.6%, to $225.9 million, due to the acquisition of competitor Newmar Corporation on Nov. 8. Winnebago paid $270 million in cash plus 2 million of its common shares in the purchase. After removing Newmar’s impact during the first quarter, motorized sales advanced by 4.9%.
  • Adjusting for the Newmar acquisition, organic revenue between both segments rose by 12%, to $552.8 million, an impressive result given that dealer-inventory rationalization (i.e., the rightsizing of vehicles on dealer lots to meet the appropriate level of current retail demand) has continued industrywide during the second half of calendar-year 2019.
  • Total order backlog increased by 20.7%, to $627.1 million. Towable backlog dipped by 26%, while motorized backlog essentially doubled from the addition of Newmar’s unfilled orders and the introduction of new Winnebago-branded products.
  • The company’s gross margin declined by 100 basis points, to 13.4%, due to a change in product mix stemming from the Newmar acquisition, as well as purchase-accounting adjustments related to the transaction.
  • Adjusting for $10 million in Newmar transaction costs, operating margin slipped by 100 basis points, to 5.5%.
  • Also adjusting primarily for the impact of the Newmar purchase, earnings per share rose 4.3%, to $0.73.

Overloaded!

Will this story have a happy ending? I’m not sure. Last night, Lorraine had too many devices active in the kitchen of our coach. A microwave, a kettle and a toaster. Whatever device she turned on last cut AC power to the coach.

No problem. A circuit breaker must have tripped. I’ll go and reset it.

All the circuits were fine. Odd. I went over to the Magnum inverter and it had a red light with the warning “AC Overload” on the display.

Okay. I haven’t seen that before. I cleared the warning light by turning the inverter off and then on again. Still no power though.  I reset the GFCI plug in the kitchen.

Power restored.

But the Magnum inverter was no longer charging our house batteries. Turning the charger on had no effect. We were inverting only. And that meant we were running our AC off the house batteries.

That is not good. We can only do that for a limited period of time.

It was late last night when this happened and I waited until this morning to deal with the issue.

I called Newmar and they walked me through a process to restore the Magnum inverter: reset all GFCI plugs, turn off pedestal power, turn off inverter, engage the battery disconnect. Wait two minutes and reverse the process.

No joy. We could invert — using our house batteries to produce AC power — but we could not charge.

Newmar suggested running the generator.

No joy.

Newmar suggested resetting the inverter.

I emptied out our slideout tray. Laying prone on the tray, I had Lorraine slide me into the underbelly of our coach. For whatever reason, the inverter is located between the rails of the basement of the coach. Very difficult to reach and not very easy to get in and reset the unit.

I reset it by depressing the power button for 10-15 seconds.

No joy.

As I write this post the house batteries are at 11.8V and soon we will be really stuck. The inverter will cut off at around 11.2V and then we will have no refrigerator, no air conditioning, no oven and, possibly the most serious issue, no Internet.

We have a mobile tech coming out this morning. His service call will cost several hundred dollars. If the inverter is bad, that will cost us about two thousand dollars (CAD). Amazon has them in stock and I can get delivery tomorrow plus another few hundred to install.

Sigh. There is always something with a motorcoach.

The lesson of this story: do not run multiple appliances at one time. Plug one too many into your coach and you may fry your inverter and it might cost you a few thousand dollars to repair.

The service tech has another option that he will try before we go down the path of replacing the inverter.

We’ll know in a few hours if that option will work.

The RV Lifestyle: Fear, Uncertainty, Doubt

Something is always broken. This from a post that I came across on the Newmar Dutch Star Owners Facebook group:

For the last month, my wife and I have been planning our new RV life. We found a 2016 DS 4369 that was just what we wanted. There were a few things that needed repairs, nothing major, and the dealer agreed to take care of them and make sure we were ready to go. Being new and never having owned an RV before and just entering retirement we wanted to learn everything we could before heading out on our own. It has been a little over a month since we decided on the DS and while waiting for the repairs to be completed I have watched every Youtube video I can find and joined every online group related to Newmar and diesel pushers that I can find. Sadly, the more I watched and read the more concerned I became. It seems that something is always broken and that every dealer is poor at best. Almost to the man, everything I read is negative about the quality of the motorhomes no matter what brand or how much you pay. I realize that most posts will be about problems but there is no shortage of problems and no stories about being happy with the quality and reliability of the product. After postponing the closing twice because the repairs were not completed, I finally decided to walk away, thinking that if this is as good as it gets, when we are all alone broken down on the side of the road it won’t be the adventure we were hoping for. Not asking for anything just offering a perspective from a Newbee’s point of view.

We have owned our coach for over three years now. We have experienced many issues with the coach. You can read about some of them here. Aside from the random deployment of a Girard awning while the coach was in motion — that issue stranded us for almost six weeks — we have travelled extensively around North America without a breakdown on the side of the road. But it could happen. That’s just the way it is.

We love our coach and we love the RV lifestyle however the RV industry is nowhere near the automotive industry in terms of quality and reliability. My view is that there will always be issues with our coach. The only question is whether an issue is highly disruptive or merely inconvenient.

Aside from the awning issue, our problems have been minor and inconvenient.

We come across people that buy into the lifestyle without doing the research. They make a significant purchase of a motorhome only to walk away after a few months because of mechanical issues. Or they get angry and frustrated because they do not expect to have any issues with their motorhome and that anger and frustration distorts the wonderful adventures that most enjoy while being on the road.

The poster walked away from the deal out of fear. Fear that something could go wrong. That the RV lifestyle would be difficult.

This quote, from The Road Less Traveled, is relevant:

Life is difficult. This is a great truth, one of the greatest truths. It is a great truth because once we truly see this truth, we transcend it. Once we truly know that life is difficult – once we truly understand and accept it – then life is no longer difficult. Because once it is accepted, the fact that life is difficult no longer matters.

NewWinnie Q4 Results

What’s up with the Newmar Winnebago deal lately? Winnebago shares. WGO is up, way up. There is a lot more to share about Winnebago and Newmar but let’s take a look at how the shares have performed since the beginning of the year:

At the beginning of the year, the stock was trading in the low 20s. And now? 49.24 at the close of market yesterday.

Shareholders have been well rewarded by Winnebago this year.

I listened in to the analyst call for Winnebago’s latest quarterly report. Aside from all of the financial blah, blah — which I expect is of little interest to most — there were a few interesting comments from President and CEO Michael Happe.

First up was a comment on Winnebago’s motorhome segment.

Revenues in this segment? Down almost 18 percent from last year.

Turning to the Motorhome segment; reestablishing a premium leadership position in this business remains a key priority for us and the launch of new products and designs continues to provide customers with an enhanced lineup of high quality innovative products. For the full year, revenues were down 17.9% from fiscal 2018, in line with the industry, and adjusted EBITDA margin of 3.9% contracted by 20 basis points.

Second, on the transition of Class-A diesel from Oregon to Iowa. Note that this is yet to include the Newmar acquisition. There is another way of saying the company negatively “affected both product availability and gross margin” — we screwed up. But, with high stock prices comes happy shareholders. Management gets cut some slack.

The Motorhome team has dedicated a considerable amount of energy and resources to positioning the business for sustained profitability. One source of market and financial pressure for the Motorhome segment has come from the Class-A Diesel category where our manufacturing and supply chain challenges surrounding our Oregon to Iowa assembly transition affected both product availability and our gross margins.

Where does Newmar fit into Winnebago’s plan to consolidate and centralize the diesel business? Not clear right now. The move to consolidate the Winnebago brand appears to be focused strictly on operational efficiency.

Executing on our plan to consolidate and centralize the Winnebago brand diesel business will improve our overall efficiency and financial strength. Additionally, the acquisition of Newmar, which is the fastest growing brand of Class-A Diesel RVs, aligns with our strategy to reenergize our Motorhome business by enhancing our position and capabilities in the motorhome market and building on the progress we have made driving growth and innovation across our offerings.

Looks like executing on this plan has not gone well. Struggling is the key word here. Happe did not clarify what he meant by the phrase “because of what we’ve done to ourselves” so we can only imagine what that might mean.

The Class A segment is where we have been struggling in part because of what we’ve done to ourselves with the diesel transition from Oregon to Iowa. It will come online with our new production of diesel in May or June of this 2020-year.

As for Newmar? Winnebago will be having “significant” conversations between the two lines of business. My read is that they intend to establish a new product line across Winnebago and Newmar. Perhaps Winnebago will be selling only “entry” coaches and Newmar will be selling only “luxury” coaches. Interesting comment.

As you can imagine as we integrate the Newmar brand, we will be having significant conversations between our Newmar business and our Winnebago business about how we can complement each other in the Class A category with those two brands. Newmar has momentum, but is a luxury line; Winnebago does not have momentum in that particular segment. It is working on some things to improve that, but we will work very carefully to try to create the right mix across both of those brands in the Class A category. So that we can remain competitively relevant going forward.

I expect that we will see some interesting outcomes from these significant conversations between the Newmar and Winnebago business lines.

Let’s hope that the new management team does not do to themselves whatever it was they did to themselves before when they tried to improve their Class A motorhome segment.