Thor’s Investor Q&A: ‘No Signs of a Slowdown’

On the heels of an impressive second-quarter financial report, referred to by Thor Industries Inc. Chairman Peter B. Orthwein as the “strongest first half of any fiscal year in the history of our company,” the publicly held Elkhart, Ind.-based firm’s senior management has addressed a series of questions as part of an “Investor Q&A” accessible on the company’s website. Those questions not only deal with the intricacies of Thor’s own balance sheets, but with a few general industry topics that RVBUSINESS.com is highlighting here:

Q: What is the current state of the Canadian RV market? What do you anticipate the market will be like for the remainder of calendar 2016?

The Canadian market is still challenging as we see continued volatility in the value of the Canadian dollar relative to the U.S. dollar. Since we sell our products to Canadian dealers priced in U.S. dollars, this creates an upward pressure on prices in local currency which has an adverse impact on demand. As a result, total Canadian retail registrations as reported by Statistical Surveys Inc., fell 12.9% for the full calendar year 2015, with towables decreasing 12.0% and motorized decreasing 26.7%. Other factors impacting the Canadian market include increased job losses, an economic recession and tighter lending practices. However, even with these negative headwinds, we are seeing some areas of improvement in certain geographies and lean, healthy dealer inventory levels in the channel.

Q: Have you seen any signs of a slowdown in demand for RVs?

At this point, we have not seen any indications of a slowdown in demand at the dealer or retail level in the U.S. Despite the recent volatility in the stock market, consumers remain positive, as the impact of lower fuel prices, increasing job creation and lower unemployment have helped consumer confidence to remain strong. This positive consumer confidence is met with improved product offerings in our industry and, combined, these factors have driven continued growth surpassing the growth rate of the broader economy.

Q: Describe the current competitive environment; is there much discounting going on?

The RV industry is always competitive, but in the past year or two, we have seen less of the more extreme discounting than we have seen in prior years, with pockets of more aggressive discounting on certain high-end products.

Q: Have you seen any softness in markets that have been heavily impacted by the oil industry?

The largest state with exposure to the oil industry is Texas, which, based on retail registration data from Statistical Surveys, accounted for 31,656 units in 2015, which was up 8.5% for the year. At this point, we have not seen signs of reduced demand in the large metro regions of Texas, though we continue to monitor the situation closely.

Q: What is the current state of dealer sentiment and dealer inventory levels?

Dealers in general remain optimistic regarding calendar 2016. Early season shows on average have been well attended with very solid sales volume. Dealer orders are generally expected to reflect a 1-for-1 replacement as units are sold at retail. Dealer inventory remains appropriate for current conditions in both towables and motorized.

Q: Do we anticipate further RV industry consolidation?

Although a significant amount of consolidation has already happened within the industry since the last recession, we do believe that opportunities remain for additional consolidation within the industry. Consolidation in our industry does not threaten the competitive environment as years of consolidation have evidenced. So, 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. As these new entrants grow, there may be additional consolidation. 

Q: Are we at the peak for shipments?

We do not believe we are at the peak for shipments. As an industry, we are impacted by many macro-economic factors such as consumer confidence, interest rates and credit availability, employment levels, inflation rate, and a number of other factors. Currently, many of these macro-economic factors remain favorable. In addition, a positive future outlook for the RV segment is supported by favorable demographics – both as more people reach the age brackets that historically have accounted for the bulk of the retail RV sales as well as an influx of younger consumers that are attracted to the RV lifestyle. These younger consumers in particular are generally attracted to lower and moderately priced entry-level products and are, in part, fueling additional growth in the industry beyond historical levels. In addition, RVIA recently updated their forecast for calendar 2016 and are now projecting 2% growth, to 381,800 units.

Q: What is the status of the new Heartland plant in Idaho?

The Heartland facility in Idaho is progressing according to our original timeline. We are ramping up production at the new western facility that is on track to begin producing and shipping units by the end of the fiscal third quarter. The Nampa facility will produce travel trailers to meet the strong demands of the West Coast dealers of our Heartland subsidiary.

Q: Thor has lost market share in calendar 2015. Why have you lost market share and what does the company plan on doing to address or reverse the losses?

From a share perspective, we have gained significant market share in motorized, which has been partially offset by some decreases in towable share, most notably in high-end fifth wheels and some travel trailers. Market share is certainly a key metric that we monitor for all our product categories – however, it is not the only metric. Overall, we generally try to take a balanced approach to growing or maintaining market share and growing or maintaining gross margin. The RV industry is extremely competitive and pricing discipline can come at the expense of market share for all participants, including the largest. We have developed a variety of new products that we believe address the largest and fastest growing segments of the market, which should help to improve share as they penetrate the broader market.

Q: What is your outlook for the rest of the year?

Continued strength in the RV market and a healthy dealer channel should result in continued, but more modest RV revenue growth in the second half of the fiscal year. Growth in gross profit margins will become more challenging as improvements in material costs and warranty expenses that were realized in the second half of fiscal 2015 will create difficult comparisons for the second half of 2016. In addition, certain benefits to gross margins, specifically the impact of the retroactive reinstatement of tariff rebates on certain imported raw material, which had a significant positive impact on gross margins in the fourth quarter of fiscal 2015, will not repeat in the fourth quarter of fiscal 2016. Finally, the effective income tax rate will likely remain higher on a year-over-year basis, compared with the relatively low rate in the second half of fiscal 2015

Q: What is your strategic plan for future acquisitions?

We have established a very disciplined approach to acquisitions to ensure we remain focused on the factors that provide the greatest likelihood to a successful acquisition and that will provide long-term value to our shareholders. We are opportunistic in our approach and seek willing sellers at a reasonable sales price. We also seek companies with strong management teams. We remain focused on acquisition opportunities within or adjacent to the RV industry.