2Q17 Overview and Q&A

Forward Looking Statements

This document includes certain statements that are “forward looking” statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward looking statements are made based on management’s current expectations and beliefs regarding future and anticipated developments and their effects upon Thor Industries, Inc., and inherently involve uncertainties and risks. These forward looking statements are not a guarantee of future performance. We cannot assure you that actual results will not differ from our expectations. Factors which could cause materially different results include, among others, raw material and commodity price fluctuations, raw material or chassis supply restrictions, legislative, regulatory and tax policy developments, the impact of rising interest rates on our operating results, the costs of compliance with increased governmental regulation, legal and compliance issues including those that may arise in conjunction with recent transactions, the potential impact of increased tax burdens on our dealers and retail consumers, lower consumer confidence and the level of discretionary consumer spending, interest rate fluctuations and the potential economic impact of rising interest rates on the general economy, restrictive lending practices, management changes, the success of new product introductions, the pace of obtaining and producing at new production facilities, the pace of acquisitions, the potential loss of existing customers of acquisitions, the integration of new acquisitions, our ability to retain key management personnel of acquired companies, the loss or reduction of sales to key dealers, the availability of delivery personnel, asset impairment charges, cost structure changes, competition, the impact of potential losses under repurchase agreements, the potential impact of the strengthening U.S. dollar on international demand, general economic, market and political conditions and the other risks and uncertainties discussed more fully in ITEM 1A of our Annual Report on Form 10-K for the year ended July 31, 2016 and Part II, Item 1A of our quarterly report on Form 10-Q for the period ending January 31, 2017.

We disclaim any obligation or undertaking to disseminate any updates or revisions to any forward looking statements contained in this listing of questions and answers or to reflect any change in our expectations after the date of this listing or any change in events, conditions or circumstances on which any statement is based, except as required by law.

Executive Overview:

  • We posted our 12th- consecutive quarter of record revenue record net income from continuing operations.
  • We posted strong growth in revenues, both organically and from acquisitions, in the second quarter with double-digit organic growth in both segments - towables and motorized. We continue to expect that Jayco will positively impact Thor’s earnings in fiscal 2017, with additional opportunities to enhance its operations over the next several years.
  • We are optimistic about Thor’s future prospects, as we continue to see new consumers entering the market and experiencing the RV lifestyle. The strong attendance, consumer enthusiasm and robust sales of our products in the early retail shows give us confidence that Thor and the industry will experience continued growth in the coming year.
  • Our priorities for the use of future cash generated from operations include continuing to support and grow our core businesses, both organically and through acquisition; maintaining or growing our regular dividends; reducing our indebtedness; and considering strategic share repurchases or special dividends. In the first half of fiscal 2017:
    • The Board increased our quarterly dividend by 10% to $0.33 per share
    • We reduced our debt facility by $35 million year to date
    • We invested over $50 million in a number of capital expenditure projects during the first six months of fiscal 2017
  • We continue to expand production capacity with a number of projects in process or planned for the second half of fiscal 2017 – estimated to total an additional $80 million of capital investments, bringing expected total capital investment to approximately $130 million for fiscal 2017.

Second Quarter Operating Results:

What was the impact on Thor’s results from the Jayco acquisition?

We posted strong growth in revenues, both organically and from acquisitions, in the second quarter with double-digit organic growth in both segments - Towables and Motorized.  Thor’s second-quarter impact from the Jayco acquisition is illustrated below:

$000s 2Q17 2Q16 Change
Towable Revenue ex. Jayco $788,147 $698,318 12.9%
Jayco Revenue $294,102 - N/A
Total Towable Revenue $1,082,249 $698,318 55.0%
       
Motorized Revenue ex. Jayco $337,798 $242,867 39.1%
Jayco Revenue $137,174 - N/A
Total Motorized Revenue $474,972 $242,867 95.6%
       
Total Revenue ex. Jayco $1,157,249 $975,071 18.7%
Jayco Revenue $431,276 - N/A
Total Revenue $1,588,525 $975,071 62.9%
       
Gross Profit ex. Jayco $173,626 $148,822 16.7%
Jayco Gross Profit $38,076 - N/A
Total Gross Profit $211,702 $148,822 42.3%
       
Gross Margin % ex. Jayco 15.0% 15.3% -0.3%
Jayco Gross Margin % 8.8% - N/A
Total Gross Margin % 13.3% 15.3% -2.0%

What was the impact of Jayco on Towable and Motorized unit volumes, Dealer Inventory and Backlog?

The impact on Towable and Motorized unit volumes, Dealer Inventory and Backlog is illustrated below:

$000s 2Q17 2Q16 Change  
Towable Unit Sales ex. Jayco 31,569 26,544 19.0%  
Jayco Unit Sales 14,185 - N/A  
Total Towable Unit Sales 45,754 26,544 72.4%  
       
Motorized Unit Sales ex. Jayco 4,391 3,014 45.7%
Jayco Unit Sales 1,440 - N/A
Total Motorized Unit Sales 5,831 3,014 93.5%
       
Dealer Inventory Units ex. Jayco 87,800 78,000 12.6%
Jayco Dealer Inventory Units 36,200 - N/A
Total Dealer Inventory Units 124,000 78,000 59.0%
       
Towable Backlog ex. Jayco $908,548 $708,408 28.3%
Jayco Towable Backlog $414,903 - N/A
Total Towable Backlog $1,323,451 $708,408 86.8%
       
Motorized Backlog ex. Jayco $628,808 $396,839 58.5%
Jayco Motorized Backlog $138,085 - N/A
Total Motorized Backlog $766,893 $396,839 93.3%
       
Total Backlog ex. Jayco $1,537,356 $1,105,247 39.1%
Jayco Backlog $552,988 - N/A
Total Backlog $2,090,344 $1,105,247 89.1%

Your revenues for the second quarter grew at a faster rate than earnings, what are the factors that drove the difference in growth rates?

Certainly we are very pleased with the 45.0% growth in net income during the second quarter of fiscal 2017, as strong double digit income growth is a testament to the hard work of everyone at Thor and our dealers. The lower growth rate of earnings when compared to revenues was driven by two main factors. First, we had a shift in revenue mix toward motorized product, as motorized growth of 95.6% was nearly double the 55.0% growth rate of towable revenues. This is important as motorized gross margins are generally lower than towable gross margins due to the pass-through nature of chassis cost, which is a much higher percentage of material cost on motorized units than towables. Second, the margin was impacted by the inclusion of $431.3 million in revenue from the Jayco acquisition. As noted above, Jayco’s margins are lower than Thor’s historical margins, thus causing a decrease to gross margins as a percent of revenues. Despite the lower margin, Jayco was still very accretive to earnings for the quarter.

What specific actions are you taking to improve Jayco’s gross margins?

All of our subsidiaries are focused on continuous improvements in their operations, and Jayco’s management team shares that focus and drive. Over the near term, we expect to generate cost synergies in certain back-office functions, such as legal, insurance and employee benefits. Over the longer term, Thor will act as a business and strategy resource to Jayco’s management team and will provide assistance in its mission to attain continuous improvement in all aspects of its operations. As a consequence, we expect Jayco’s cost structure to steadily improve.

All of our subsidiaries, including Jayco, operate with great autonomy. During the second quarter, Jayco’s management team initiated a restructuring of the Company that is designed to create greater leverage of talent and generate increased efficiencies throughout the various aspects of its operations. Jayco named Matt Thompson as Chief Operating Officer, who along with Derald Bontrager, President of Jayco, has assembled a cross-functional management team that will be responsible for sharing best practices and standardization of materials and processes across all of Jayco’s businesses. The team is helping to shift Jayco’s emphasis to be more of a product and sales-focused company, resulting in a flatter, leaner structure that is more nimble and responsive to the marketplace. We expect that this will have a positive impact on Jayco’s gross margins in future periods as management fully implements their plan.

Thor continues to report very strong sales and earnings growth, what is driving this performance? How does Thor’s performance compare to industry growth over the same period?

Thor’s strong growth in the second quarter was driven by the addition of a full quarter of results from Jayco as well as strong acceptance of its towable and motorized products by consumers and dealers. With the recent release of industry data for January, our 19.0% organic growth in towable unit sales for the quarter was modestly ahead of industry growth of 16.8%, while our 45.7% organic growth in motorized unit sales for the quarter materially surpassed industry growth of 16.9%. The exceptional growth in Motorized sales is the result of Thor’s Motorized segment operating heavily in the fastest growing part of the market, the continuing success of Recreational Utility Vehicles (RUVs) that have limited competition as well as new products or product enhancements introduced by Thor Motor Coach such as the new Quantum, Compass and Gemini models.

Backlog is up significantly, even absent the increase from the Jayco products. What’s driving the increase and do you have the capacity to fulfill demand?

Backlogs have increased as a result of the positive reception by dealers and consumers of the products we introduced over the past year, particularly the more affordably priced travel trailers and motorhomes, and industry growth.

In alignment with our strategic plan, management has constantly focused on matching our capacity with the growing demand for our products in a prudent manner that appreciates the realities of our industry. This process has resulted in a number of initiatives, including organic process improvements, realignment of existing facilities, acquisitions of existing facilities and new plant construction, all designed to increase our capacity. Fiscal 2017 expansion projects are currently in process at Keystone, Jayco, Heartland and Thor Motor Coach. These projects will enable us to meet a growing demand in a timely fashion. We expect capital expenditures in the second half of fiscal 2017 of approximately $80 million, bringing the anticipated total capital investment for the full year to approximately $130 million.

As we look ahead, we see continued growth in the demand for our products and growth in the industry. The process of evaluating our future production needs based on demand for our products is an ongoing one, and management remains committed to balancing financial prudence with the goals of our strategic plan as we endeavor to best position Thor to seize the opportunities presented by the demand for our products and our growing market.

What was the nature and amount of expenses recognized in the second quarter that were directly related to the Jayco acquisition?

In the second quarter of fiscal 2017, we incurred amortization expense related to the Jayco acquisition of approximately $10.0 million, which included amortization of intangible assets such as dealer network and tradenames.

What is the state of the labor market where you operate? Have you experienced any labor cost inflation?

The labor market continues to be quite tight in northern Indiana, with the most acute labor tightness within the City of Elkhart. Given the strong demand for and limited supply of labor, we experienced some increases in labor costs due to higher wages and benefit costs. We will remain competitive when it comes to offering the right combination of wages and benefits to attract the best workers to our operations, but we will also manage our growth with a focus on areas that offer larger pools of available, quality workers. As a result, many of our expansions are planned for areas outside of Elkhart, such as Howe, Middlebury and Goshen, where the availability of labor is better.

Year-to-Date Operating Results:

What was the impact on Thor’s results from the Jayco acquisition?

We posted strong growth in revenues, both organically and from acquisitions, in the first six months of fiscal 2017, with double-digit organic growth in both Towables and Motorized.  Thor’s first-half impact from the Jayco acquisition is illustrated below:

$000s YTD FY17 YTD FY16 Change
Towable Revenue ex. Jayco $1,674,720 $1,442,997 16.0%
Jayco Revenue $618,402 - N/A
Total Towable Revenue $2,293,122 $1,442,997 58.9%
       
Motorized Revenue ex. Jayco $656,409 $493,966 32.9%
Jayco Revenue $280,017 - N/A
Total Motorized Revenue $936,426 $493,966 89.6%
       
Total Revenue ex. Jayco $2,398,637 $2,005,422 19.6%
Jayco Revenue $898,419 - N/A
Total Revenue $3,297,056 $2,005,422 64.4%
       
Gross Profit ex. Jayco $365,675 $301,038 21.5%
Jayco Gross Profit $82,779 - N/A
Total Gross Profit $448,454 $301,038 49.0%
       
Gross Margin % ex. Jayco 15.2% 15.0% 0.2%
Jayco Gross Margin % 9.2% - N/A
Total Gross Margin % 13.6% 15.0% -1.4%

What was the impact of Jayco on Towable and Motorized unit volumes?

The impact on Towable and Motorized unit volumes for the first six months of fiscal 2017 is illustrated below:

$000s 2Q17 2Q16 Change  
Towable Unit Sales ex. Jayco 67,004 55,477 20.8%  
Jayco Unit Sales 29,924 - N/A  
Total Towable Unit Sales 96,928 55,477 74.7%  
       
Motorized Unit Sales ex. Jayco 8,473 6,083 39.2%
Jayco Unit Sales 2,777 - N/A
Total Motorized Unit Sales 11,250 6,083 84.9%

What was the nature and amount of expenses recognized in the first six months that were directly related to the Jayco acquisition?

For the first six months of fiscal 2017, we incurred purchase accounting adjustments related to the Jayco acquisition that reduced gross profit by approximately $2.6 million, of which $2.2 million was related to the Motorized segment and $0.4 million was related to the Towable segment. In addition, amortization in the first six months relating to the Jayco acquisition was $22.9 million, which included $8.3 million associated with acquired backlog, with the remaining representing amortization of dealer network and tradenames.

Balance Sheet and Cash Flow:

What payments have you made on the debt facility and what was the average interest rate on borrowings? How much availability existed at January 31, 2017 under the line?

During the quarter we paid the debt facility down by $15 million in addition to the $20 million repaid during the first quarter, which resulted in a remaining debt balance of $325 million as of January 31, 2017.

Interest on borrowings under the credit facility is variable. During the second quarter of fiscal 2017, the weighted-average interest rate on borrowings was 2.23% while the weighted-average interest rate for the six-month period was 2.19%.

As of January 31, 2017, available and unused credit under the revolver was $137.6 million.

What drove the reduction in the cash balance of $75.2 million in the first six months of Fiscal 2017?

Cash provided by operating activities was $52.8 million, while the primary uses of cash during the first six months of 2017 were investments in property, plant and equipment of $50.9 million, principal repayments on our revolving credit facility of $35 million and regular dividend payments of $34.7 million.

What is driving the increase in inventory and accounts receivable for the first six months of Fiscal 2017?

Total inventory increased to approximately $477.6 million at the end of the second quarter compared to $403.9 million at July 31, 2016. The primary drivers of this $73.7 million increase is the increase in production capacity that has been completed in the first six months of fiscal 2017 – which results in additional WIP and raw material - as well as a seasonal increase in finished goods inventory.

The $82.1 million increase in accounts receivable compared to July 31, 2016, is a result of the strong growth in sales as well as the timing of sales near the end of the quarter.

What are your priorities for future cash utilization?

Our priorities remain consistent with our prior objectives. We strive to maintain an adequate cash balance on hand to ensure we have sufficient resources to respond to opportunities and changing business conditions within the RV industry. We will use future available cash generated from operations to support and grow our core businesses, both organically and through acquisitions, maintain and grow our regular dividends over time, and reduce indebtedness. Strategic share repurchases or special dividends as determined by the Board of Directors will also continue to be considered.

In addition to the reduction in indebtedness of $35 million during the first six months of fiscal 2017, we also increased our quarterly dividend from $0.30 per share to $0.33 per share and invested over $50 million in capital projects in support of our core businesses.

Market Conditions:

Are you seeing any signs of slowing in the market?

No, in fact, we are seeing the opposite. There continue to be a few important trends underlying growth in the industry which we’ve seen in our backlogs and growth in retail sales throughout 2016 and into early 2017:

  • First, new consumers continue to adopt the RV lifestyle. The RVIA is forecasting 3.5% unit growth for the industry in calendar 2017, which follows the strong 15.1% growth achieved in calendar 2016.  If current forecasts come to pass, 2017 will be the strongest year for RV shipments since the 1970s.
  • Second, show attendance has indicated a solid start to 2017. There have been robust increases in attendance and improved sales over what was a very strong 2016 show season. The Tampa show, which is one of the largest of the year, experienced good weather and record attendance of more than 70,000 people.
  • Finally, demand from younger families and new RV consumers buying more affordably priced travel trailers and motorhomes continues to grow. This adoption of the RV lifestyle by a younger demographic, we believe, will continue to contribute to overall growth in the RV industry for years to come.

Describe the current competitive environment, is there much discounting going on?

The RV industry is always competitive, as our subsidiaries and our outside competitors continue to drive the industry forward with new and better products for dealers and consumers. However, given the industry-wide capacity limitations on certain products, most notably towable RVs, we have seen less traditional discounting pressure overall in the market than we did several years ago.

What is the nature of the current Dealer and Consumer credit environment?

The wholesale lending environment remains healthy, with normal credit line utilization and continued discipline among lenders concerning curtailments. Consumer credit is available, and retail lending standards also appear healthy.

What is the impact of rising interest rates on demand for your products?

We remain in a historically low interest rate environment, even after the recent increase in short-term rates by the Federal Reserve. We do not expect a significant change in the lending environment in fiscal 2017. Overall, if we see gradual increases in rates as we have seen recently, we would expect little adverse impact on demand for RVs.

What is the current state of the Canadian RV market?

The Canadian market remains challenging as the weakness in the value of the Canadian dollar relative to the U.S. dollar continues. Since we sell our products to Canadian dealers priced in U.S. dollars, this creates upward pressure on prices in the local currency which generally has an adverse impact on demand. Although the Canadian market experienced sequential double-digit annual declines in 2015 and 2016, in recent months the rate of decrease has begun to decline and in some cases retail registrations have begun to increase. For the month of December, Canadian retail registrations were up across towables and motorized, and for the final calendar quarter of 2016, Canadian retail registrations increased 1.6% for towables and were down only 0.7% for Class A and C motorhomes.

How does consolidation within the dealer base impact Thor?

Consolidation within the dealer base, as well as expansion of dealers with new locations, can be a positive for Thor as dealers value partnering with strong manufacturers like Thor on their long-term growth initiatives. Consolidation may also present some challenges to us as larger dealers generally account for higher sales volume and thus may exercise more pricing power within the overall marketplace. This pricing power is balanced to a certain extent by our ability to provide the larger unit volumes on a timely basis. Our industry is defined by competition for dealers and, with or without dealer consolidation, that competition will continue.

How do used RVs impact the demand and pricing for new products?

Robust demand for used RV inventory enhances trade-in values, which is necessary to support the new RV market where many consumers choose to purchase new units every 3-5 years. In recent years, availability of used RV inventory has been limited while new products at the entry level have been priced competitively, leading many consumers to buy new products. We do recognize that as an alternative to new RVs, low prices on used products may prompt consumers to buy used instead of new. Overall, we view a healthy used RV market as a positive impact on the overall RV industry.

Outlook:

What is your outlook for the remainder of fiscal year 2017?

We continue to expect double-digit growth in revenues and improvements in earnings throughout fiscal 2017. Industry growth dynamics should continue as consumers remain optimistic about future economic conditions and new consumers continue to enter the RV market. We also expect a strong contribution to sales and earnings from the inclusion of a full year’s results from Jayco’s operations. Given our increased production to meet demand in the seasonally slower first half of the fiscal year, we may see lower sequential and year-over-year growth rates in the second half of the year.

What is the current status of your efforts to meet the demand for RVs in the West Coast markets?

Demand for product on the West Coast remains strong, and we see additional opportunities for growth in the West Coast markets, particularly in California and the Pacific Northwest. Currently, we have production facilities in Pendleton, Oregon, Nampa, Idaho and Twin Falls, Idaho. The second production line at Heartland’s Nampa, Idaho facility began operation during the second quarter. We will continue to evaluate demand and capacity availability at our West Coast production facilities to determine the best long-term solutions for our dealers and consumers on the West Coast.

When looking to add capacity, what metrics do you look at to determine if it’s a wise investment?

Unlike other, more capital intensive industries, RV production facilities are typically smaller, between 70,000 and 90,000 square feet, with an average cost in the range of $3 million to $6 million. With this modest investment, we review a number of return metrics, with a focus on achieving a rapid payback on the investment which enhances return on invested capital. In addition, we typically build plants with a degree of flexibility so we can shift production to a variety of products depending on demand fundamentals. This flexibility further enhances the investment profile of new production facilities.

With all your current capacity additions, do you expect the startup of production to have an adverse impact on margins? Will it have an impact on quality and warranty cost?

Although we usually experience costs associated with the startup of production in new or expanded facilities, it is important to understand that the impact of such costs depends on the relative size of the expansion and the complexity of the production involved. Generally, the startup of new or expanded towable facilities happens more quickly than the startup of motorized facilities; with lower initial costs. Over the past year, we have expanded a number of plants and started up new plants and their impact on our margins was not material.

We have also learned from the lessons of earlier expansion efforts and are now taking a more disciplined approach to expansions, with a focus on training new workers and ramping production at a more measured pace. In the cases of our recent expansions, we often start new workers on existing production lines to allow them adequate opportunity for training prior to the opening of the new plant. We believe this approach provides better potential outcomes for increasing productivity in new plants while maintaining quality standards.

Thor has continued to grow revenues since the recession. Has Thor reached its peak?

No.  We do not believe either Thor or the RV Industry has reached a peak.  RVIA has forecasted growth in industry wholesale shipments for calendar 2017 of 3.5%, which follows the strong growth achieved in calendar 2016.  We see many positive indicators to continued growth for both the RV industry as a whole and Thor specifically, which should result in the latest RVIA forecast being conservative.  Among the factors driving our optimism for continued growth:

  • Demographic trends, including:
    • younger consumers entering the market sooner than prior generations
    • an increase in the number of people entering the age brackets that historically have accounted for the bulk of retail sales
    • increasing demographic, economic and geographic diversity among campers
  • Changes in how consumers desire to spend their free time - with a much stronger desire to spend time with their friends and families enjoying the wide-array of destinations available throughout North America, tailgating, or attending other activity based events
  • Forecasted economic stability – relatively low inflation,  interest rates and fuel prices along with continued job and wage growth and strong, steady consumer confidence rates are expected to continue to fuel demand for RVs
  • Thor’s financial strength – we have a strong balance sheet to fund organic growth, a history of solid cash flow, availability under our credit facility and a track record of being successful, opportunistic acquirers.  We believe Thor will continue to capitalize on opportunities to grow in a strategically sound way.

Given this is the longest expansion in the RV industry in history, what gives you confidence that it will continue?

Unlike many of the expansions we’ve experienced over the past two decades, the current expansion has been driven largely by new consumers entering the RV lifestyle. These new consumers generally gravitate toward more affordably priced segments of the market; including travel trailers, Gas Class A and Class C motorhomes. We view such a shift in the market to be more sustainable over the long term. We see a number of other positive factors among consumers that will likely spur continued growth; including improving personal income, home values and increasing stock prices driving higher personal wealth, continued strength in light truck and sport utility vehicle sales, and the future potential for tax reform that may provide a boost to consumers. In addition, unlike previous expansions which achieved pre-recession levels in 2-3 years, it’s taken seven years for us to reach the pre-recession peak achieved in 2006. Previous expansions have typically progressed for 2-3 years beyond the achievement of pre-recession levels, supporting our belief that this recovery is likely to continue for the next few years.

What are your views on RV industry consolidation?

Consolidation in our industry does not threaten the competitive environment as years of consolidation have evidenced. In fact, it tends to benefit the industry by heightening the competitive landscape and broadens the customer base by driving innovation and attracting more individuals to the RV lifestyle, all to the benefit of the retail customers. Therefore, even with more consolidation, we are confident that the competitive environment that drives innovation and improved product offerings throughout our industry will continue. In addition, we have seen a number of new or returning entrants to the RV manufacturer base since the recession as well.

What is your strategic plan for future acquisitions? Given that there are fewer RV manufacturers as potential targets, are you targeting other adjacent industries?

We continue to evaluate acquisitions as we have in the past. We remain an opportunistic acquirer focused on strong brands and accretive transactions, and as potential acquisitions arise, we will evaluate them based on their strategic fit within Thor.

How would tax reform impact Thor? How much of your cost of goods is sourced overseas?

Until we see the details of any bills passed or expected to pass Congress for changing the structure of corporate taxes, we cannot speculate on the potential impact of such changes. However, consistent with past practice, we will utilize the technical expertise of our internal and outside tax professionals to best respond to any changes in the tax code. Should we see a reduction in net corporate income tax rates, our cash priorities are expected to remain the same.

With regard to individual tax rates, any reductions that would be to the benefit of consumers would likely translate into improved consumer confidence and disposable income, both of which may benefit demand for large discretionary products, like RVs, in the future.

As for the amount of our cost of goods sourced from overseas, given that we purchase many components that are themselves assembled from components sourced domestically and internationally, it would be nearly impossible to provide an accurate measure of international sourcing.

Contact Us

Thor Industries, Inc.

601 East Beardsley Avenue,
Elkhart, Indiana 46514-3305

Tel: +1 574 970 7460
investors@thorindustries.com

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