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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.

Everything’s Coming Up Daisies

Research and Markets, claiming to be the world’s largest market research store, has just released their report on the Recreational Vehicle market in North America. Their analysts forecast a pretty substantial rate of growth between 2018 and 2022 for the RV industry, a compound annual growth rate of just over 8 percent.

I did not have a chance to read the report because they want to charge me $2,500 for a single user electronic version. I did, however, get their overall message of continued growth.

The report covers the following companies:

  • Camping World Holdings
  • Forest River
  • Gulf Stream Coach
  • Northwood Manufacturing
  • REV Group
  • Thor Industries
  • Winnebago Industries

Several of them are private. Of the ones that are publicly traded, this is what their stock prices have been doing over the past five years.

Camping World is a leading outdoor and retailer and includes brands like Good Sam.

REV Group is recently listed and not without some controversy. REV Group builds American Coach, Monaco, Holiday Rambler and Fleetwood.

In June of this year, Johnson Fistel launched an investigation into potential violations of federal securities laws by REV Group to determine if the firm issued misleading business information to investors.

I’ve written about Thor before as they are a powerhouse company in the RV world. They cover a lot of brands including Airstream, Bison, CrossRoads, Cruiser, DRV, Dutchmen, Entegra, Heartland RV, Highland Ridge, Jayco, Keystone RV, K-Z, Redwood RV, Starcraft RV, Thor Motor Coach and Venture RV.

And the last publicly traded company highlighted in the report is Winnebago. I’ve written about them here when they recently acquired a boat company.

How do these companies stock prices line up against the S&P? For the most part, pretty closely:

Perhaps the RV industry will continue to grow at 8 percent CAGR from 2018-2022. As an investor, I hope that S&P 500 also continues its bull run for the next 5 years, particularly at the start of our retirement.

However, it has been a very long bull run. Including dividends, the S&P 500 has returned about 25% annually since March of 2009. Whenever this bull ends and the markets go down, sales of RVs may not continue to come up like daisies.

RVs That Float

Interesting news release from Winnebago:

Winnebago Industries, Inc. (NYSE:WGO), a leading outdoor lifestyle product manufacturer, today announced that it has acquired Chris-Craft, an iconic recreational boat builder, from Stellican Ltd., which has owned Chris-Craft since 2001. Terms of the transaction were not disclosed.

With a brand heritage that dates back to 1874, Chris-Craft is an industry leader in recreational boating craftsmanship and quality. The business is poised to leverage its strong brand reputation and drive future growth through the introduction of new models and product lines, category extension opportunities supported by increased production capacity and expanded dealer reach.

“Chris-Craft is an iconic, premium brand that shares many similarities with our own heritage Winnebago brand, including a commitment to providing customers with the highest quality products and services,” said Winnebago Industries President and Chief Executive Officer, Michael Happe. “The company’s strong brand, high-quality product line and premium position in the marine market make Chris-Craft an attractive addition to our portfolio. Chris-Craft marks Winnebago’s first entry into the marine market, which we believe has significant runway for growth, with a large and increasing population of current and new boaters who enjoy extraordinary experiences on the water.”

Mr. Happe continued, “Importantly, this acquisition aligns with our strategic initiative to further diversify Winnebago Industries within the outdoor lifestyle market and gives us a strong base on which to build an additional revenue platform over time. We believe there will be synergies realized across our value chain and that the Chris-Craft business has material expansion opportunities available. Additionally, we see significant intersection between the RV and marine lifestyles and view marine as a natural adjacency to our existing outdoor lifestyle portfolio, with similar customer demographics and significant ownerhip crossover. With a broader, more balanced portfolio of products uniquely positioned across the outdoor lifestyle and leisure travel industries, we expect to continue to drive improved profitability and shareholder value over the long term. I look forward to working with the talented Chris-Craft team and to welcoming them to the Winnebago family.”

“I am delighted that Chris-Craft has found an ideal partner in Winnebago Industries,” added Chris-Craft Chairman and Stellican Ltd. Founding Partner, Stephen Julius. “Winnebago is a natural fit for Chris-Craft’s premium brand, with a similarly iconic brand, complementary cultures, and a shared dedication to design, craftsmanship, quality, and customer service.”

Financial details about the deal are limited although Winnebago made the following observations to their investors:

  • Undisclosed transaction value, expected to be paid with cash on hand and debt
  • Provides platform to drive expanded revenue growth opportunities
  • Transaction expected to be immediately accretive to fiscal 2019 EPS
  • Continue to expect to reach our goal of 1.5x or lower Debt-to-EBITDA by end-Fiscal 2018

Interesting to see an RV manufacturer diversify this way. Chris Craft is primarily focused on outboard and sterndrive boats although they do offer one cruiser, the Commander. Perhaps Winnebago intends to go further upscale and leverage common components in systems that tend to crossover between RVs and marine. They do note in the investor material that Chris-Craft’s current focus is primarily on 21-38’ boats. And that 90% of all boats sold in the U.S. are < 25’.

RV Of The Year

RV Business recently named the RV of the Year. And the winner?

A Winnebago.

Interesting.

The Winnebago Horizon is a Class A diesel and it seems to be comparable in price and features to coaches like the Newmar Ventana although there are no tags available in the 40-foot model of the Winnebago.

My concern would be the quality of this product. When I read David’s experience with his Winnebago, I thought to myself, life is too short for dealing with way too many build issues. And, my goodness, what an experience he had with his new build. Eventually the sale did not go through. His story, unfortunately is not unique. You can download this couple’s pdf and get a sense for the anger and frustration caused by the lack of quality control.

Quality was one of the reasons why the Winnebago product never made its way to our short list.

The RV industry is certainly under pressure to deliver. Record demand puts a lot more strain on the manufacturers. Hopefully this Horizon is a better built coach. It is one thing to get an award from an industry publication. It is another to build a solid reputation with customers.