Thor Industries has announced results for the first quarter of fiscal 2020, which ended Oct. 31, 2019.
Net sales for the first quarter increased 22.9 percent to $2.16 billion, including $493.0 million in net sales from Erwin Hymer Group (EHG), which was acquired on Feb. 1, 2019. Dealer inventory rationalization is nearing completion, Thor said in a press release. North American independent dealer inventory of Thor products is now at its lowest point since the first quarter of fiscal 2017.
“In our fiscal first quarter, we achieved a pronounced improvement in our operating results,” Thor Industries President and CEO Bob Martin says, “reflecting the benefits of the flexible and highly variable cost model we have developed, as we increased gross profit margins in our North American RV segments despite modest decreases in net sales. EHG’s results for the quarter were generally in line with expectations as EHG has historically generated flat-to-negative first quarter results due to the European holiday shutdowns that occur in August, and due to the higher concentration of marketing and advertising expenses in the fiscal first quarter to support the annual RV shows in Europe.
“Industry conditions in North America continued to improve as the independent dealer inventory rationalization that has affected our results over the past year nears its end. Dealer optimism is strong in both the North American and European markets with excellent feedback from our September Open House in Elkhart, Indiana, and positive performance at industry wholesale and retail shows in Germany and across the United States. We look forward to continuing that momentum as the spring RV show season starts in North America in January and the European selling season begins.”
First Quarter Highlights
First-quarter net sales were $2.16 billion, an increase of $402.8 million, or 22.9 percent from the first quarter of fiscal 2019. The addition of $493.0 million in net sales from the European RV segment was partially offset by net sales decreases of 6.1 percent and 3.6 percent in the North American Towable RV and the North American Motorized RV segments, respectively.
Consolidated gross profit margin was 14.3 percent for the quarter, compared to 11.8 percent in the prior-year period, primarily reflecting favorable overall product mix and reductions in material, labor and warranty cost percentages in the North American RV segment, tempered by the gross profit margin from the European RV segment, which was lower than the overall North American gross margin for the current quarter.
Net income attributable to Thor and diluted earnings per share for the first quarter of fiscal 2020 were $51.1 million and $0.92, respectively, compared to $14.0 million and $0.26, respectively, in the prior period. Results for the first quarter of fiscal 2020 included incremental interest expense and amortization of intangibles related to the acquisition of EHG amounting to $39.7 million, or $0.58 per diluted share, while first quarter fiscal 2019 results were adversely impacted by a foreign currency forward contract loss and costs related to the acquisition of EHG which, in aggregate, totaled $57.1 million, or $1.02 per diluted share.
The company’s effective income tax rate for the first quarter of fiscal 2020 was 24.5 percent compared to a tax rate of 55.7 percent in the prior year. The primary reason for the decrease in the overall effective income tax rate between the comparative periods was the non-deductible foreign currency forward contract loss of $42.6 million that occurred during the first quarter of fiscal 2019. The company expects a worldwide effective tax rate for the remainder of fiscal 2020 ranging between 19 percent and 22 percent, before consideration of any discrete tax items.
North American independent dealer inventory rationalization continued during the fiscal first quarter, as North American industry wholesale shipments once again declined at a faster rate than retail registrations. As a result, independent dealer inventory levels of Thor products in North America decreased by 22.8 percent to approximately 101,500 units as of October 31, 2019, compared to approximately 131,500 units as of October 31, 2018. Independent dealer inventory of Thor products in North America, following the first quarter of fiscal 2020, was at its lowest point since the first quarter of fiscal 2017. Management believes independent dealer orders will generally be commensurate with consumer demand during calendar 2020.
European dealer inventory is also going through a modest rationalization, though inventory levels were not as high as in North America on a relative basis. Management believes that independent dealer inventory levels of EHG products in Europe, while somewhat elevated in certain locations, remain generally appropriate for seasonal consumer demand in Europe moving into calendar 2020.
Segment Results
North American Towable RV sales were $1.20 billion for the first quarter of fiscal 2020, compared to first-quarter sales of $1.28 billion in the prior-year period. This decrease was primarily driven by lower unit shipment volume compared with the first-quarter of fiscal 2019, as independent dealers continued to reduce their inventory levels, but was partially offset by a shift in product mix toward higher-priced units.
North American Towable RV gross profit margin rose 330 basis points to 15.3 percent in the fiscal first quarter, driven by numerous management-led actions that reduced material, labor and warranty costs as a percent of sales, as well as a shift in mix toward higher-margin units.
North American Towable RV income before tax was $104.3 million, compared to $74.6 million in the first quarter last year. This improvement was driven primarily by the improved gross profit margin.
North American Towable RV backlog increased $48.6 million to $1.07 billion at the end of the first quarter of fiscal 2020, compared to $1.02 billion at the end of the first quarter of fiscal 2019. The Company believes the current towable RV backlog is returning to a more normalized level and is reflective of dealer trends toward smaller, more frequent, order patterns.
North American Motorized RV sales were $415.9 million for the first quarter compared to $431.2 million in the prior-year period. The decrease in motorized sales was primarily driven by a shift in product mix towards lower-priced products.
North American Motorized RV gross profit margin rose 50 basis points to 10.8 percent in the fiscal first quarter primarily due to various management-led actions that improved labor and warranty costs as a percent of sales.
North American Motorized RV income before tax was $21.8 million, compared to $21.7 million last year, driven primarily by the increase in gross profit margin, mainly offset by an increase in selling, general and administrative expenses.
North American Motorized RV backlog decreased approximately $70.3 million to $670.0 million from $740.2 million a year earlier. The company believes the current motorized RV backlog is reflective of the shift in dealer order patterns to smaller and more frequent orders.
European RV sales were $493.0 million for the first quarter. Historically, for EHG, the first quarter represents the slowest quarter due to the annual European holiday shutdown period in the month of August, as well as the consumer trend of purchasing units earlier in the calendar year for use during the summer months. Historically, EHG’s quarterly net sales tend to improve sequentially from the first to the second quarter, and even more so into the third quarter.
European RV gross profit was $64.6 million, or 13.1 percent of net sales, in the fiscal first quarter. Gross profit margin is historically impacted in the fiscal first quarter by reduced fixed cost absorption from seasonally lower first quarter sales levels.
European RV loss before tax was $23.0 million, which includes the combined impact of amortization of intangible assets and depreciation expense of $27.5 million. The European RV segment loss before tax was also impacted by advertising and marketing costs associated with the Düsseldorf Caravan Salon and other annual retail shows which occur during the first quarter.
European RV backlog was $1.29 billion as of Oct. 31, 2019, reflecting current levels of demand within the European market.
“During the quarter, we continued to reduce acquisition-related debt levels. To date, we have repaid approximately $500 million on the acquisition-related debt. Our cash priorities remain the same. We will use our cash to fund operations, to pay down our acquisition-related debt, to continue to pay our regular dividend and to evaluate share repurchases strategically and opportunistically,” Thor’s Senior Vice President and CFO Colleen Zuhl says.
Integration Update
“Our integration is advancing as planned and we are making progress in a number of areas. We are already leveraging our global supply chain relationships to enhance our material spend and are also leveraging efficiencies across our global operations,” Martin says. “Additionally, our international product transfer team is aggressively developing a plan to manufacture EHG products in North America and we expect to release additional details regarding their efforts shortly.”
Outlook
“We are optimistic about our prospects for improved results in fiscal 2020, particularly following such a solid start to the fiscal year,” Martin says. “Attendance and feedback from recent shows in Düsseldorf, Germany; Hershey, Penn.; Fontana, Calif.; and our Open House in Elkhart, Ind., have been very positive.
“We expect the independent dealer inventory rationalization to be complete by the end of the calendar year, and believe this process, in both North America and Europe, has largely run its course.
“Consistent with our comments from last quarter, our outlook for North American markets is to remain relatively flat, or decline modestly, in fiscal 2020, barring a significant macroeconomic change, with the potential for better results should retail demand strengthen. For the European retail market, we expect to see modest growth similar to fiscal 2019.
“Finally, at our recent Investor Day in Germany, we introduced our long-term financial goals. We believe we will achieve $14 billion in annual net sales, attain sustainable gross margins of 16 percent, and generate more than $3 billion in cumulative net cash from operations by the end of fiscal 2025. We believe that the long-term outlook for the RV industry and for Thor Industries is compelling, and we look forward to regularly reporting on our progress toward these goals.”
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